Russia Reality: Paying Taxes to Shield Staff From Criminal Liability

By May 12, 2022No Comments

Fear of criminal liability motivates corporates to pay taxes in Russia—but banks are rejecting some tax payments.

The threat of criminal prosecution of their employees in Russia is one reason some US-based companies continue to make tax payments in Russia. Meanwhile, several US companies report that Russian tax payments made by entities outside the US have been rejected by a US-based bank.

  • These takeaways emerged at the most recent NeuGroup session where members discuss the challenges facing finance teams at companies that continue to do business in Russia, have frozen operations there or are exiting the country.
    • None of the companies present said they have stopped making tax payments.

No tax holidays. “We discussed how to negotiate with the authorities there in terms of a tax holiday,” one member said this week. “And the result of the negotiation was that if you don’t pay those excise taxes promptly and on time and in full, our representatives in Russia, executives, will be under criminal liability. So we made the choice to pay those taxes,” he said.

  • “We’re actively keeping our taxes paid for the same reason—criminal exposure to our employees,” another member responded. “We’ve discussed it, but we’ll be paying our taxes.”
  • Those statements came in response to a member who asked if any companies had decided not to pay taxes. She said someone on the tax team had raised the issue and, after some back-and-forth, the company had come to the same conclusion as its peers about legal liability. The member “wanted to find out what everyone else is doing” and bring that information back to the tax team.

Rejected payments. After NeuGroup senior executive advisor Paul Dalle Molle said that it appears that “everybody is rigorously paying” Russian taxes, one member quickly added, “So long as the banks will allow us to pay”—an allusion to one bank that members say has rejected Russian tax payments from entities based outside the US.

  • Three members said one US-bank had rejected Russian tax payments made by entities based the UK, Ireland and Switzerland. One of the members said the explanation he heard is that the bank’s Office of Foreign Assets Control (OFAC) license allows it to process tax payments for US entities only.
  • Another member notes that value-added tax (VAT) payments go to the Russian central bank, which is a sanctioned institution. That could create a need for the bank to get approval from OFAC.
  • One member said a different US bank located in London had successfully paid Russian taxes from a ruble account for a Swiss entity owned by his US-based company. “So it may depend on the bank itself or what license it has. We may be purely lucky,” he said.
  • As a result of all this, members are building in long lead times for tax payments. Even if payments are approved, delays are common as bank compliance checks can be laborious.
    • Mr. Dalle Molle observed, “ When banks do sanctions checks on proposed tax payments, some appear to weigh more heavily the domicile of the remitting entity, while other banks weigh more heavily the ultimate country of ownership of the entity’s parent.”
    • He also noted that tax payments are being made successfully both from outside Russia into Russia, and with domestic Russian transfers. Many companies need to do both because of how their businesses are structured.

Other takeaways. Members discussed a range of other topics during the session, producing these takeaways:

  • Treasury teams are seeking clarity from compliance and legal teams on new OFAC sanctions that prohibit US persons from providing accounting, trust and corporate formation, and management consulting services to any person in Russia.
    • “Treasury services seem to be out of scope for this. But accounting support, so control or FP&A services, may be in scope. We’re waiting for our legal team to come back on this,” one member said.
  • Members report slow or no progress in opening accounts at Chinese banks in Russia as more US banks retreat or fall under counter-sanctions.
    • One member said the two Chinese banks his company approached early in the crisis were “very reticent to do anything.” But given current circumstances and a dearth of Russian banks that are unsanctioned, “we may try to do another attempt.”
  • Several companies have stopped all FX hedging in Russia, citing high costs. And while some corporates continue to engage in balance sheet hedging, none are hedging cash flows.
    • “For cash flow hedge purposes, it’s very expensive and there is uncertainty,” one member said.
Justin Jones

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