Cyprus, Taxes, and Russian Transfer Pricing

The Russian government is irate over the proposal to levy a tax that is almost 10 percent on Cyprus bank deposits:

For years, Russian firms -- both private and state-run -- have been using Cyprus as a tax haven. Attracted by a corporate tax rate of 10% -- half that of Russia's -- Russian investors have funneled money into Cyprus shell companies since the early 1990s. The money is then repatriated through investments in Russian ventures. Cyprus is actually the leading source of foreign investments into Russia, according to data from the Russian central bank. The tax-dodging scheme is similar to ones used by corporations and individuals from a host of nations in tax shelters worldwide.

What is this tax dodge? Paul Krugman points us to a Financial Times post:

This link occurs through CIS [Commonwealth of Independent States] commodity-based shell companies that deposit transactional balances of their CIS-based legal subsidiaries engaged in oil, mineral, and metals exports, often involving transfer pricing and other tax minimization strategies.

It’s interesting that some of the Big Four accounting firms had recent trainings on the new Russian transfer pricing rules Cyprus of all places. I noted a few years ago that transfer pricing related to Russian oil exports was a big deal. The Russian government has never been all that adapt at enforcing its transfer pricing rules so it is of no surprise that a lot of Russian companies have shifted income into Cyprus, which is a low tax jurisdiction. What this new tax effectively does is to raise the tax rate on these offshore funds. Russia should be less upset with this proposal and more aggressive at stopping this transfer pricing manipulation.