"A new era is beginning, in which tax preferences will be available only to genuine and transparent business," says Vasile Lupu, head of Consul Group's international tax practice.
Vasile Lupu was born in the Republic of Moldova, in the USSR. In 1998 he moved to Moscow with his parents. He is a graduate of Lomonosov Moscow State University, of the law department of the Higher School of State Audit at the Accounts Chamber of the Russian Federation. He has more than 7 years of practice advising on international and Russian tax law. Today Vasile Lupu heads Consul Group's international tax practice.
Why, in choosing a field, did you settle on international tax planning?
While I was studying at Moscow State University I did practical training in various departments of the Accounts Chamber of the Russian Federation, and I even managed to go on several business trips to the regions. At that point I became interested in how things are arranged in other countries, and not only in the constituent entities of the Russian Federation. I wanted to broaden my horizons and to acquire a universal competence in the field I had chosen, tax. That is how I found myself in the Russian office of KPMG, one of the largest international audit firms, where I was able to take part in a great many tax projects. Especially absorbing were those that let me study international treaties, the tax systems of other jurisdictions, and the particular features of doing business in one country or another.
You head the international tax planning practice. What brought about the firm's decision to make this area a separate practice?
Over the past few years, tax and currency legislation has been changing extremely fast, everywhere. The global fight against base erosion and profit shifting (the BEPS project) has intensified, that is, against the transfer of profit to a jurisdiction where it is not taxed. Put simply, business owners all over the world seek, first, to increase their income, second, to protect their business from external threats and, third, to reduce their costs. International tax planning makes it possible, by a lawful and effective route, to reach the second goal, by creating a clear legal structure for holding an asset. And, thanks to the lawful instruments of international treaties, it also reduces tax costs, which means reaching the third goal. Consul Group specialises in comprehensive support for the businesses of property owners. In six years of work we have become a reliable regular partner for more than 250 owners of commercial properties. Clients who already had successful experience of local matters being resolved began to come with questions of international tax planning and of support for them in cross-border transactions. As requests from existing partners accumulated, a decision was taken to separate, from the tax and legal advisory practice, a distinct practice specialising specifically in international taxation.
What main client tasks does the practice you head have to deal with?
For us the main task is to help our clients comply with international rules and the laws of the Russian Federation in any cross-border activity. We have no projects of a single standard type. Broadly speaking, we work on projects of three types:
- we bring an international legal structure into line with the current legislation;
- we create an international legal structure that carries on activity in country A, country B and so on, on the basis of the client's individual features and needs;
- we recover a receivable from a foreign company on that company's own territory.
This covers both a calculation of the costs and the design of an algorithm, and the implementation of that algorithm. We prepare opinions from the standpoint of the current legislation, taking into account Russian and foreign case law and bills that are already in existence.
I am speaking of support for the client through the opening or liquidation of a legal entity and of a bank account, due diligence on legal entities, transactions for the purchase and sale of assets or companies, compliance for cross-border transactions using international treaties, and so on, taking into account the case law of Russia and of other countries. We also support the client in dealings with Russian and foreign tax authorities.
How has work on international tax planning become more difficult in the light of the changes in Russian legislation in recent years?
Yes, it has become livelier. For example, what was lawful and acceptable in 2017 in Russia, or in 2018 in Cyprus, may turn out to be risky today. This is down to the rapid change in international and Russian tax legislation, and in currency legislation as well. Changes in relations between countries, and in the political climate, play a significant and sometimes a decisive role. Everything is connected, and ignoring any of the factors is unacceptable. Every detail matters, including one that seems to have nothing to do with tax (for example, a visit by officials from the United States to Cyprus, or even a political scandal in Austria) but that changes the requirements for doing business. As a result, costs rise, or the businessman's activity stops altogether if he does not adapt in time. To minimise unpleasant surprises it is necessary to keep a finger on the pulse and to play by the rules, openly. The financial world is becoming open, bank secrecy has all but disappeared, registers of beneficial owners are being introduced, and offences very quickly become known and are prosecuted. Today the requirements for conducting international business are changing very fast. Some experts call the new conditions unfriendly.
Which changes in international tax legislation have the greatest effect on the practice?
BEPS is of fundamental importance. It includes the transfer-pricing rules, the automatic exchange of information (CRS), and the Multilateral Convention to Counter the Erosion of the Taxable Base and the Shifting of Income and Profit out of Taxation (MLI). The MLI is especially relevant. It enters into force from 2020 and, almost at the same moment, changes most double tax treaties (DTTs). It will become harder to obtain relief from tax withheld at source, and for many the preferences in a DTT will become practically inapplicable. The consequence is a heavier bureaucratic and tax burden on business. The European Directive DAC6 should also be mentioned. In short, that directive obliges intermediaries (employees of banks, of law firms and of audit firms, and so on) to report every scheme of international tax planning in which they are involved, if the scheme contains at least one of the signs of aggressive tax planning. The world is becoming entirely transparent. The approach of the tax authorities is aimed at identifying the real purpose (the substance) of a transaction. Which documents were used for that purpose is already of less importance.
Are your clients only citizens of the Russian Federation, or do you also work with foreigners who have business interests in the Russian Federation?
They are mainly citizens of the Russian Federation. There are also former citizens of Russia who have emigrated to other countries that are more comfortable for them. Formally, of course, these are foreign investors with business interests in the Russian Federation, which allows them to minimise their liabilities to the Russian tax service.
Have you been in situations where you have to persuade a client to put all of your recommendations into practice?
Yes. The most common case is one in which the Federal Tax Service has, by some miracle, not audited a prospective client, while he himself (or his team) has not kept up with the change in the legislation and for years has not updated his compliance. He goes on acting under the old legislation. Another problem arises when a businessman takes advice from foreign lawyers who turn out not to know the Russian case law on the point. The advisers then unintentionally give him recommendations which, if carried out, may be fatal for the business here. In both cases we try to convey to the client that his actions are directly prohibited by the Tax Code, or to show him similar case law with a dismal outcome, and to recommend what exactly must be brought into line with the current legislation first. In most cases the client realises that the risks really are there, and we then begin the modernisation. But there are also those who say, "I have been doing it this way for 10 years, and everything is fine." They are usually the same people who come back a few months later with the actual problems with the tax authorities about which we had warned them. At that stage, the services we can provide are in all likelihood no longer able to correct the mistakes. What is more, a real threat of criminal prosecution often hangs over the client by then.
Which clients are easier to work with, in speed and in following your recommendations to the letter: Russians, or foreigners in the Russian Federation?
Much of this is individual, and I cannot give a definite answer to this question. Age and mentality matter. With young businessmen, both Russian and foreign, the work often starts straight after the first meeting. But there are also domestic entrepreneurs who made their capital in the 1990s, with the most closed outlook and no wish to understand that the world has changed and that business can no longer be done in the old way. On the whole, everyone understands the terms of the work and what it produces. In my experience, our services have not yet been ordered merely to be put away "in a drawer".
In which direction has Russian tax legislation been moving lately? Does it help cross-border dealings to develop, and does it contain enough safeguards for the parties to these legal relations?
Today the global tax trend is towards complete transparency. Total control, and the fight against abuse of tax relief, have to be added to that. Russian tax legislation is constantly being supplemented and improved. It keeps pace with the rest of the world, and we even manage to lead in digitalisation. On the whole that is, of course, positive. But it gives the tax authorities wide powers, while taxpayers find it hard to defend themselves where there is "overreach on the ground". It is hard to say whether Russian legislation helps cross-border relations to develop.
What changes in international tax planning would it be sensible to make in Russian tax legislation, so as to protect the interests of the parties to these legal relations, both taxpayers and the state?
To protect the interests of everyone involved in these legal relations, it seems sensible to raise the competence of the tax authorities. For example, dividing the tax authorities into departments by industry could improve their understanding of the processes and of the particular features of a given type of business. I consider it no less important to make the measures of tax control more transparent. A detailed and public set of rules for conducting tax procedures should help taxpayers to understand the logic by which inspectors act. The result would be, on the one hand, protection of the state budget's interests through a genuine expert assessment of each case and, on the other, greater transparency in the measures of fiscal control, which should help to build trust and a positive dialogue between business and the state.
How do you see the further development, over the coming years, of yourself as a specialist in international tax planning, and of the practice you head within Consul Group as a whole?
First, to do everything possible so that as many of our clients as possible comply with every requirement of the legislation. We have partner law firms and audit firms in Cyprus, Luxembourg, Switzerland, Liechtenstein and Turkey. That allows us to represent clients' interests on the ground. Second, the global changes in the legislation on international tax planning, the trend towards transparency and the abolition of "bank secrecy" are regarded as radical changes, and as the end of the offshore era. It will no longer be possible to abuse tax preferences with impunity and without grounds. Conducting international business will, at a minimum, be more expensive and riskier.
As Vasile Lupu notes, the task of Consul Group's advisers is to support their clients and to protect their interests, and to build proper legal structures that allow the clients to reach their goals within the current legal framework: "We regard it as our main task to protect our clients from mistakes by the tax authorities on the basis of which a taxpayer acting in good faith may suddenly be treated as acting in bad faith. We support the business, we help to build proper legal structures, we advise on transactions, and we structure groups of companies within the current legal framework. All of this allows us to defend clients' interests successfully in disputes with state bodies, unlike cases in which the owners arrange the activity inside their own company themselves. In those situations the owners are more likely to receive an underpayment, fines and penalty interest, even where they are in the right."
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