Yaroslav LOMAKIN: Who will replace Cyprus in 2013?

Ukrainian businesspeople are seeking new offshore financial centers (OFC) to keep their assets in. The TSN channel quotes a Da Vinci AG analytical group survey as saying that Caribbean, Asian, and African OFCs are going to replace the popular Cyprus in 2013. “The Cyprus situation is likely to result in a redistribution of financial flows among other offshore jurisdictions in 2013 and a search for new effective ‘tax havens.’ In 2013 national groups will be more actively exploring Central America, Africa, and the Caribbean,” the forecast says. Experts note that an indirect proof of this is the growing export of goods to some tax haven countries (Belize, the British Virgin Islands, the Seychelles, the Marshall Islands, and the Bahamas) in the 10 months of 2012. The experts are also convinced that, given an inhospitable economic and tax climate in Ukraine, it is futile to expect a mass-scale return of funds to Ukraine. It will be recalled that Ukraine and Cyprus signed treaties in November 2012 on the avoidance of double taxation and prevention of income tax evasion. In addition, Cyprus remains Ukraine’s main investor with total investments of 14.5 billion dollars. Is Ukrainian capital really going to change its “quiet” havens? And how can the money be returned to this country? The Day put these questions to Yaroslav LOMAKIN, owner of Honest & Bright Ltd. which deals with the establishment of and support for offshore companies).

Do you think Ukrainian business will really change Cyprus for offshore centers in Central America, Africa, and the Caribbean?

“As of today, there is no alternative to Cyprus as far as the price-quality ratio is concerned. But certain changes in taxation came into force in Cyprus on January 1, 2013, while company registration fees have been raised. For this reason, Ukrainian offshore scheme users may look for some other jurisdictions in order to register their companies for similar purposes. But it is unlikely that these will be Pacific countries because they are in any case on the Cabinet’s list and companies will face sanctions for operating with them. Also unlikely is such a destination as the Cayman Islands. The Ukrainian money will be scattered into another direction. It is big and medium-scale business that uses offshore centers. But in the current business realities, it is only big business that will be able to afford to use offshore schemes or other schemes aimed at reducing taxation by foreign economic means. It is only the burgeoning big business that will be able to earn enough to cover the offshore scheme expenses. In other words, the bar has been raised for offshore users. But big businesspeople can use not only the OFCs, but also some more prestigious companies in Denmark, Austria, the Netherlands, the UK, Singapore, and Hong Kong, which rank high on the Cabinet’s list.”

To what extent have these operations risen in cost?

“While earlier it took a company an average 3,000 euros to register in Cyprus, now one must shell out 4,000 euros, submit a report, and pay taxes. This is the result of a toughened tax law in Cyprus. Besides, Ukrainian users are now finding it more difficult to deposit money onto the accounts of offshore companies, for hard-currency restrictions in Ukraine are aimed not only against offshore companies. With the present-day currency regulations, it is rather difficult even for quite a legal company to conduct a transaction abroad. Taxmen have put up a lot of barriers to stifle the foreign economic activity, but the latter is grinding to a halt not only in offshore centers, but also elsewhere.”

How can money be prevented from fleeing to offshore centers?

“The offshore status will make Ukraine a prosperous country. So, in my view, to become a tax paradise and receive rivers of money, Ukraine only has to essentially cut taxes. If you look at the outside world, you will see a global tendency towards tax reduction. The UK, the Netherlands, Hong Kong, Singapore, Latvia, etc. – all the developed countries are slashing taxes. The entire world is showing tax reduction and business improvement coupled with a more rigid administration of taxes. All the world financial centers have their own offshore havens: Europe has Luxembourg and Lichtenstein, the US has the Cayman Islands and some reduced-taxation inland states, while China, Hong Kong, Singapore, and Japan use offshore jurisdictions all over the world. Every country wants its offshore centers to receive money from the entire world. And if Ukraine declares itself an offshore area, money will flow into it from everywhere. But the Americans and others will also come immediately in order to redistribute these funds and forward them to their domestic havens.”

To what extent should the tax burden be eased?

“In my view, the tax load on business should not exceed 10 percent. In these conditions, business develops well and pays all taxes legally. Tax reduction will allow businesspeople to work cheaper, and they will stop using tax optimization schemes. I know a lot of entrepreneurs who are prepared (even if they can manage to reduce all the expenses to zero) to pay 10 percent and not to resort to any optimization schemes.”