MILOGOLOV NIKOLAI, ADIT, candidate of sciences (econ.)

Tax Policy Centre, Financial Research Institute (Moscow)nmilogolov@nifi.ru

FROM OFFSHORE WEALTH TO OFFSHORE ROBOTS: THE EMERGENCE OF “TECHNOLOGICAL TAX HAVENS”

Questions

1. How is the digitalization changing the global business & economic environment?

2. How does the digitalization reshape the international tax rules?3. What are the OFC/IFCs positions in this discussion?4. What tax instruments & tax policy approaches OFC/IFCs can

potentially use for attracting the key value drivers of the digitalized businesses?

5. What is the possible impact of such international tax competition on the location of the digitalised businesses?

How will the role of offshore financial centers / internationalfinancial centers (OFC/IFCs) change in the age of digitalisation& multilateral tax cooperation?

Digitalization of the global economy

• High level of mobility of key factors of value creation

• Increased role of user’s data & participation in value creation (network effects)

• Virtual & economic scale without physical mass

• Increased role of two-sided business models (platforms) & tendency towards concentration of market power

• Volatility due to fast technological developments and changes in business model

New models• E-commerce• Cloud computing services• Participative networking

platforms (B2B, B2C, C2C)• E-payment services• Algorithmic trading

Traditional businesses• Block chain in banking

compliance• Robots in manufacturing• Internet of things in electricity

supply• 3D printing in customizing health

products

Key features (OECD BEPS Action 1 Report, 2015)

Examples

Digitalization and FDI

• MNEs in highly digitalized industries have a “lighter” FDI footprint than traditional MNEs. They tend to concentrate their operations in a few highly developed countries and their investment patterns are shaped by fiscal and financial motives more than those of traditional MNEs. As digital technologies and business models tend to disseminate across the broader economy, this may suggest the onset of a new era of international production and MNE internationalization paths (Casella, Formenti for UNCTAD 2018)

• Digitalisation is associated with the reliance on financial engineering and SPEs in low-tax countries (about one third of FDIs). However, financial centers still have high inward FDI-to-GDP ratios, even when SPEs are removed. Some entities located in financial centers also take an active management role and are not just passive holding companies (Elkjaer, Damgaard for OECD 2018)

• A shift away from large-scale manufacturing projects toward smaller manufacturing facilities closer to key markets. ICT sector is now the largest sector for FDI measured by number of projects, and third measured by number of job (Institute of Business Value, 2018)

Increased mobility of the key value drivers

2

Algorithms & automatic business

processes

Intellectual property (IP) &

other intangibles

Qualified staff

• IT-specialists are “international workforce” easily migrating to other countries

• Key digital business processes are not linked directly with the equipment (server, robots, etc.) situated in the given jurisdiction

• IP/intangibles can be easily transferred

Relevant business strategies:

Instability (fluctuation) of the parts of the global value creation chain

Remote economic activity

2

Algorithms & automatic business processes

Intellectual property (IP) & other intangibles

Qualified staff

• IT-specialists can work remotely for projects all around the world under flexible conditions (freelance/service contract)

• Offshore-located equipment (server, robots, software, artificial intelligence, etc.) can be important value driver under the new business models

• IP and other intangibles can be exploited internationally

Relevant business strategies:

Growing and challenging inconsistency between the places of economic presence (real and less mobile) and the places of value

creation (virtual and highly mobile)

What do we mean by OFC/IFC?

• “Booking” of transactions in jurisdictional legal framework without relevant economic substance taking place in the jurisdiction• Legal and service infrastructure for investment-related and business services (fund management, inheritance, M&A deals, SPVs, insurance, trust business, tax planning, IBC activity)• Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies

and• More popularly, centers which provide some or all of the following services: - low or zero taxation; - moderate or light financial regulation; - banking secrecy and anonymity• The level of “added value” and “non-resident bias” in the services provided differs

greatly between different OFC/IFCs

Characteristics of OFC/IFCs

“OFC is a center where the bulk of financial sector activity is offshore on both sides of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities and assets are non-residents), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents” (IMF, 2000)

Digitalisation – a second chance for the OFC/IFCs?

• OFC/IFCs economies inherently relate more on international than on national economic activities. MNCs from the OFC/IFCs generate most of its revenue from other states and have most of its assets abroad (UNCTAD, 2018)

• OFC/IFCs generally have little own physical resources in terms of population, land, natural resources (UNCTAD, 2018)

• OFC/IFCs economies business and legal environment provide certainty to global businesses (Baker McKenzie, 2017)

• The best workforce still works in large economies, where they can benefit from the education and scientific infrastructure, population size, digital ecosystems (OECD, 2018)

• The most of revenue is also generated in large economies, where the main markets are located (OECD, 2018)

Opportunities

Challenges

Tax policy conceptual issues

• Where the value is created?

• How much profit to allocate to the market state?

• How to collect tax?

• Do we need new or reform of existing rules?

• What is a characterization of payments for digital services for tax purposes?

• Does the taxing approach in line with the basic principles:- neutrality- ability to pay- simplicity- fiscal efficiency- fairness

Plan of empirical research

2

o Analysis of value creation process in the digitalized business models (cloud computing, fintech, robotics, e-commerce, artificial intelligence)

o Analysis of the tax policy developments related to the challenges of the digitalization in the chosen OFC/IFCs and their role for international tax planning

o Delineating the level of the attractiveness of the analyzed jurisdictions tax regimes

o Assessing how successful are current OFC/IFCs’ tax regimes in attracting the global digitalized businesses by different types

o Discussing the future impact of the digitalised businesses on OFC/IFCs’ tax regimes’ transformation and global FDI flows

E-commerce

The sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing orders (OECD, 2011)

Examples (B2C): advertising services purchased online e-book subscription to music store

Examples (B2B): web-hosting services storage of clients’ data on the secured server accessed

through the internet subscription to financial market news & analytics through the

website

Examples (B2G) electronic platform for government procurement

Taxi Aggregator Business Model

Agregator.TaxiB.V. Netherlands

ClientsTaxi Drivers

Uzbekistan

Netherlands

Data from supply side

Data from demand side

• Setting its own rules on local taxi ride market• Influence on prices, demand and supply• Influence on taxi drivers’ salary and their working

hours

• Obtaining economic benefits (profit) from the access to local market

• Analysis and processing of the user’s data• Creation of value (development,

maintenance, enhancement and protection of the algorithms & IP)

• Technical support & management of Mobile App

Cloud computing

2

• Cloud computing is considered fundamental to accelerating the digitalization of other businesses and, therefore, the entire economy

• Low margin, large scale, little economic benefits from user’s data exploitation

• Problems of classification for DTT purposes: services or royalties

Application layer & software

SaaS – Software-as-a-Service

Use of the latest software instantly

Platform layer & operating system

PaaS – Platform-as-a-Service

Programming tool for creating the applications

System layer & physical servers

IaaS – Infrastructure-as-a-Service

Storage of data & maintenance of networks

A model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computer resources (e.g. network, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interactions (NIST 2011)

Cloud computing

2

Provider of cloud computing services:management, control & IP

Equipment and servers

Users B2C Users B2B

Maintenance and development of the software and infrastructure

Robotics

2

• The concept of “robot” is quite vague and does not yet have asufficient legal definition at the international level – althoughthere are a series of solutions that currently exist that could beused in framing it, from the most classic conception of amachine with a shape and movements similar to humans,allegorically presented in works of science fiction for manyyears, to fully dematerialized artificial intelligence solutions(Barros, 2019)

• Main anticipated economic challenges of automation is itsunclear impact on employment:

- massive loss of jobs (unemployment)- massive creation of the new jobs- neutral effect on employment- different effects in short-, middle- & long-term perspective- unclear influence of migration

Robotics

2

• Robotax in any form can be effective only if it is introduced ininternationally coordinated manner

• “Technological tax havens” otherwise will benefit from theincreased taxation of robots in other countries

• 22% to 29% of US jobs are or will be offshorable in the nextdecade or two, clarifying that these estimates are based on twodefining characteristics of jobs that cannot be offshored: (i) the jobmust be performed at a specific work location; or (ii) the jobrequires face-to-face personal communication (Frey, Osborne,2013)

• Reason 1 to tax robots – anticipated revenue losses of personalincome tax, social insurance contributions and VAT resulted fromtechnological unemployment

• Reason 2 to tax robots – increase in public spending to financeadaptation of society to automatization

Artificial intelligence (AI)

2

• AI is currently mostly used as an advanced way of analysingand using Big Data

• The sub-fields include recognition, understanding, learning,problem solving, reasoning and decision making

• Artificial Intelligence (AI) is often used in reference to machinelearning, whereby machines are trained with historical data torecognise patterns and classify new data, however, themachine is not learning entirely on its own; rather, the learningprocess requires a significant level of human input to makesure the data is interpreted correctly

• Deep learning is a subset of machine learning. It takes alayered approach to calculations, starting from high-levelabstractions and gradually moving to more specific features.As deep learning is able to tackle unstructured data such astext and images, it has many potential applications for theanalysis of Big Data

Fintech

2

Digital technology

Payment services

Advisory & planning

Investment & trading

Lending & funding

Insurance Security Operations Communications

Distributed ledger (blockchain)

x x x x x x x x

Big Datax x x x x x x

Internet of things

x x

Cloud computing

x x

Artificial intelligence

X x x x

Biometric technology

x x

Augmented reality

x x x

Fintech involves not only the application of new digital technologies to financial services but also the development of business models and products which rely on these technologies and more generally on digital platforms and processes (OECD (2018), Financial Markets, Insurance and Private Pensions: Digitalisationand Finance)

Distributed Ledger Technology (DLT)

2

(OECD (2018), Financial Markets, Insurance and PrivatePensions: Digitalisation and Finance)

• …blockchain technology… is a database technology that allowsthe creation, secure transfer (with finality) and storage ofinformation

• …distributed ledgers are not centrally controlled andadministered. Rather, the responsibility for administering andverifying transactions is shared across the users of theblockchain

Examples:• cryptocurrency payments• cryptocurrency transfer of money• initial coin offerings (ICO)• using blockchain technology in back offices of financial

institutions (compliance)

Netherlands

2

• NL tax system is not a tax haven… but it is highly internationallycompetitive

• Country position about taxation of digitalized businesses is to find theinternational consensus either than to introduce the unilateral measures

• Reassessment of the tax system in order to shift burden from labor tocapital, adapt to digitalization (income earned through platforms)

• Tax rulings will only be available for taxpayers with sufficient economicnexus in the Netherlands, for cases that are not driven by tax savingmotives

• The wage tax reduction attributable to R&D personnel performingqualifying research activities combined with the deduction for qualifyingnon-wage expenses directly attributable to qualifying research activities(from 1 January 2016, the reduction is 32% (up to 40% for start-upcompanies) of the first EUR 350,000 in R&D costs and 16% for suchcosts exceeding EUR 350,000)

• Limiting the period of “30% rule” from 8 to 5 years

Netherlands

2

• Dutch TP approach in relation to IP & contract R&D was “ahead of itstime” where most of the BEPS Action 8-10 concepts already werereflected in the domestic law (Decree of 21 Aug. 2004 amending thetransfer pricing policy, IFZ2004/680M.) including:

- guidance on value-adding functions in relation to intangible property,- specific guidance around synergy benefits,- volume benefits for procurement,- pooling benefits in relation to internal reinsurance

• New TP decree (Decree of 22 Apr. 2018) even decreased the level ofcomplexity of TP rules in comparison with the other countries becauseit stated stronger than ever that ALP is based on economical conditionsrather than contractual arrangements

• Tougher penalties for non-compliance with the ALP are introduced

Netherlands

2

• Royalties received in the Netherlands are generally treated as ordinarybusiness income that is currently taxed at the statutory tax rate of25% (or 20% for profits up to EUR 200,000), unless the royaltyincome qualifies for the innovation box (effective tax rate of 7%)

• There is no withholding tax on royalties except situations of abuse (forexample, if paid to low tax countries)

• The Netherlands’ treaty policy is to include no or very low withholdingtax rates for royalties in its tax treaties if possible

• Some WHT on royalties with the rate differentiations are in DTT withArgentina, Azerbaijan, Barbados, Belarus, Brazil, Canada, China,Estonia, Greece, Israel, Korea, Malta, Pakistan, Suriname, Thailand,Vietnam

• On the request of the treaty partner, the Netherlands is willing toconsider reasonable anti-abuse provisions

• A tax credit is generally available for foreign withholding tax on royaltyreceipts (if any) under the Netherlands’ tax treaties

Netherlands

2

• The objective of the innovation box at time of introduction in2007 was to promote innovation and high-qualityemployment and to foster the innovative power of the Dutcheconomy

• In order to be able to gain entry into the innovation box, anumber of requirements should be met:

(i) intangible asset (owned by the taxpayer);(ii)self-developed (development by the taxpayer);(iii) R&D asset and/or patent

• The FHTP and the EU Code of Conduct group considered theDutch innovation box to be consistent with BEPS Action 5and found the regime not harmful under the EU Code ofConduct

Netherlands

2

• Personnel performing R&D & creating IP, software

• Control of R&D performed under contract

• Ownership for IP

US or non-EU Parent Co EU or NL Parent Co

NL R&D CoNL Holding/IP Co

Subsidiaries in EU & non-EU states

• Acquired IP• No R&D • No legal

ownership of IP

Royalties / dividends

Royalties

Low tax Parent Co

Singapore

2

Corporate taxation

• Territoriality (only income from sources in Singapore or foreign incomeremitted or deemed remitted in Singapore is subject to tax inSingapore)

• Only income of revenue nature is taxable, income of capital nature isnot taxable

• Relatively low headline tax rate of 17% (lower effective tax rateapplicable under special tax incentives)

Personal taxation

• Employment income of short-term employees (less than 60 days) isnot taxed in Singapore

• Foreign-sourced income of individuals is not taxed in Singapore

• Employment income is taxed only if employment is physicallyperformed in Singapore

Singapore

2

• 250% tax deduction on qualifying expenses incurred for R&D activities carriedout in Singapore,

• If the R&D activities are performed by a contract R&D service provider outsideSingapore a 100% tax deduction is available, provided the R&D activities arerelated to the trade or business of the taxpayer

• These rules are available also for cost-sharing if R&D is undertaken on thetaxpayer’s behalf

• Expenditure incurred to acquire legal and beneficial ownership of specified IPRsqualifies for automatic write-downs on a straight-line basis over a choice of 5,10 or 15 years. Valuation report is needed

• As announced in the 2017 Budget, all specified IP income may qualify forconcessionary tax rates under a newly introduced incentive regime called theIntellectual Property Development Incentive (IDI). However, the introduction ofthe IDI has been deferred to a later date (yet to be announced). Current non-manufacturing DEI/PC incentive holders have until 30 June 2021 to continuetreating IP income as qualifying income for their incentives

• 400 per cent deduction up to a specified cap on expenditure incurred onactivity along the innovation value chain, including R&D (if performed bothwithin & outside Singapore)

Singapore

2

• Singapore-sourced royalty income derived by non-residents is subject to a finalwithholding tax of 10%, which can be reduced by DTT, however, most of DTThave none-zero rates for royalties

• Withholding tax should not be applicable for payments made for the transfer ofcopyrighted articles or which entail a complete alienation of IP. Completealienation of IP refers to “[a] sale where consideration is paid for the perpetualtransfer of:

– the full legal and economic ownership; or– the full economic ownership in respect of a specific geographical location, or theexclusive rights in the copyright that constitutes a distinct and specific property”.

• Strong Transfer Pricing rules related to IP, generally incorporating all the BEPSAction 8-10 recommendations

• Transfer, assignment or licensing of IP rights is treated as a supply of services forGST purposes. The GST rate is slated to increase from 7% to 9% sometimebetween 2021 and 2025. With effect from 1 January 2020, reverse charge isapplicable to GST-registered local businesses that are not entitled to full inputtax credit.

Singapore

2

Tax incentives for:• Hiring foreign personnel performing R&D & creating

IP & software in or for Singaporean company• Control of R&D performed under contract• Economic and legal ownership for IP in Singapore• Acquisition of IP rights from related & unrelated

parties• Establishing the center of global profits from IP in

Singapore

Singapore IP Parent Co

Subsidiaries all over the world

Royalties

Gains from the alienation of IP

Hong Kong

2

• IP rights for which profits tax deductions are from July 2018 provided for thecapital expenditure incurred for their purchase: patents, know-how, copyright,registered designs and registered trademarks, design (topography) ofintegrated circuits, plant varieties and performances

• "The expansion of the scope of profits tax deductions is one of our initiatives toencourage enterprises to engage in the development of IP trading business andpromote Hong Kong as an IP trading hub in the Asia-Pacific region.Implementation of this initiative through the Amendment Ordinance would addnew impetus to our efforts," a spokesman for the Commerce and EconomicDevelopment Bureau

• Acquired IP shall fulfill conditions:

- Economic and legal ownership, co-ownership possible;- Used for production of profits;- Registration in any country;- Not purchased from an associated party;- Not used in the interest of another person outside HK

Hong Kong

2

• However, Manufacturers cannot claim tax allowances for machinery,equipment, and intellectual property rights used in their productionprocesses outside Hong Kong

• Section 39E is an anti-avoidance provision that aims to limit taxavoidance schemes arising from machinery or plant leasingarrangements

HK Parent

China Subsidiary

- Providing IP, know-how- Leasing the modern

manufacturing equipment- Manufactured advanced

goods

Hong Kong

2

• Domestic WHT on royalties is 4,95%• Most DTT have non-zero royalty WHT rates• Territoriality• Headline tax rate of 16,5% and 8,25% for the first HKD 2 million ($254,700) of

enterprise profits

• “Super deduction,” would be introduced to encourage R&D. It would allow all typesof businesses to enjoy a 300 percent deduction for the first HKD 2 million in eligibleR&D expenditures and another 200 percent deduction for the remainingexpenditure

• The IRO definition of R&D encompasses a range of activities, such as “anysystematic, investigative or experimental activities carried on for the purposes ofany feasibility study or in relation to any market, business or managementresearch,” in addition to scientific and technological activities

• The four traditional pillar service industries — financial services, tourism, trading,and logistics and professional services — have decreased in their share of GDP fromthe highest point of about 60 percent in 2007 to about 57 percent in 2016

• The proposed R&D super deduction could benefit the finance and professionalservices industries, because it might motivate them to revamp their onlineplatforms for resource management or to develop e-commerce marketplaces

Hong Kong

2

• The government considers cryptocurrencies to be a virtual commodity, not legaltender

• Income from the exchange of cryptocurrencies, initial coin offering tokens, orcryptocurrency mining is taxable to either a domestic or foreign taxpayer only ifthe underlying income is Hong Kong-sourced and it gives rise to business income(which is fully taxable), but not capital gains (which are not taxable)

• Cross-border withholding taxes will not apply to cryptocurrency-related incomeexcept in the case of a payment to a nonresident taxpayer that involves HongKong-source royalty payments

• If an employee in Hong Kong receives cryptocurrency as salary, wages, orotherwise in connection with employment in Hong Kong, the amount —computed in Hong Kong dollars — is included as part of the employee’s incomeand subject to the salaries tax at progressive rates, ranging from 2 to 17 percent

• The presence of the rule of law; a free trade policy, including the absence ofrestrictions on inbound and outbound investment; the lack of capital orcryptocurrency controls; transparency; low headline tax rates; a technologicallyadvanced ecosystem; and the Hong Kong Securities and Futures Commission’srecent proposals for favorable legislation in the crypto space

Malta

2

• No WHT for royalties in domestic law and in the most of its DTT

• 15% flat income tax rate for qualifying expatriates (with employment income ofat least 75 000 Euro) for 4 (non-EEA nationals) and 5 years (EEA and Swissnationals)

• Malta does not currently have sophisticated, detailed transfer pricing legislation.Reference to the arm’s length concept is, however, made in certain income taxprovisions

• Tax credits for approved R&D projects are available

• In July 2018, three statutes comprehensively regulating ICOs, cryptocurrencyexchanges and the provision of services related to distributed ledger technology(DLT) became law, namely:

– the Malta Digital Innovation Authority (MDIA) Act;– the Innovative Technology Arrangements and Services (ITAS) Act;– the Virtual Financial Assets (VFA) Act.

Malta

2

• MDIA is responsible for, amongst others, recognizing service providers, certifyingITAS, issuing guidance to assist service providers and innovative technologyarrangement applicants in registering and seeking certification, as well aspromoting the general interest and legitimate expectations of users of ITAS andtheir service providers, i.e. fair competition, best practices and consumer choice

• The ITAS Act sets out the regime applicable for the registration of technologyservice providers and the certification of technology arrangements

• The VFAA regulates ICOs (or, as they are referred to therein, “initial virtualfinancial asset offerings” or “initial VFA offerings”, defined as a method of raisingfunds whereby an issuer issues virtual financial assets and offers them inexchange for funds)

• Detailed clarifications of tax consequences of transactions with DLT assets forincome tax and VAT based on existing tax principles

• Since Malta is an EU Member State, what is legal and regulated in Malta shouldbe considered legal in other EU Member States, especially in light of the fact thatMalta, in its regulation, was mindful of EU principles and laws. Invitingblockchain business to the island should enable Malta to move beyond itsphysical size limitations, permitting growth beyond its borders by seizing theopportunity created by the disruptive technology

Malta

2

• DLT assets classification:(1) Coins – functionally they constitute the cryptographic equivalent of fiat currenciesand are meant to serve as an alternative to legal tender (means of payment)(2) Financial tokens – DLT assets exhibiting qualities that are similar to equities,debentures, units in collective investment schemes, or derivatives and includingFinancial Instruments;(3) Utility tokens – DLT Assets whose utility, value or application is restricted solely tothe acquisition of goods or services either solely within the DLT platform on, or inrelation to which they are issued or within a limited network of DLT platforms. Do nothave characteristics of the securities

• Income tax and VAT principles will apply to DLT transactions and each transactionneeds to be assessed by reference to the nature of the activities, the status of theparties and the specific facts and circumstances of the case

• Profits realized from trading in coins will be treated like the profits derived fromtrading in fiat currencies. Proceeds from the sale of coins held as trading stock in abusiness, as well as profits from cryptocurrency mining deemed to be performed asa business venture, are taxed as ordinary income and are exempt from VAT

• Profits from holding financial and utility tokens will be treated as income and can beconsidered capital gain

• ICO is out of VAT scope event and no taxable income is also arising

Malta

2

MT Cryptocurrency project company

Venture entrepreneurs(EU / non-EU)

- Coins- Financial tokens- Utility tokens

EU / non-EU venture investors (buyers)

- Raising the financing

- Dividends & capital gains

MT / EU / non-EUICO financed enterprise

Cyprus

2

• An individual who was not previously resident in Cyprus and who takes upemployment in Cyprus may benefit from a 50% exemption on the earnings fromemployment in Cyprus, provided these earnings exceed EUR 100,000 perannum. The exemption does not apply if the person was a tax resident of Cyprusfor the tax year immediately preceding the year of commencement of theemployment or for three or more of the five years immediately preceding thebeginning of the employment. The exemption is available for 10 years

• Headline CIT rate of 12,5%

• The amendments to the IP regime maintain the 80% deduction for qualifyingincome. The changes focus on the application of the modified nexus approachand on the narrowing of the definition of what constitutes qualifying IP assets

• Qualifying IP assets include patents, computer software, as well as IP assetswhich are non-obvious, useful and novel and from which the taxpayer earns anincome not exceeding EUR 7.5 million per annum (EUR 50 million for taxpayerspart of a group) during a 5-year period. Marketing-related IP, such astrademarks, image rights, etc. are no longer considered qualifying IP assets

• The application of the benefits of the IP regime is dependent on the level of theresearch and development activities carried out by the qualified taxpayer. A 30%uplift of qualifying expenditure is available

Cyprus

2

• No WHT on royalties paid to non-residents

• No WHT on royalties in most of tax treaties

• No detailed transfer pricing rules. Cyprus solely follows the arm's lengthprinciple which is described in section 33 of the Cyprus income tax law

• The tax relief for investors in qualifying small and medium-sized innovativeenterprises – a deduction of the cost of a qualifying investment from theinvestor's taxable income of up to a maximum amount of 50% of the taxableincome or EUR 150,000, whichever is lower

• The investee must be a SME innovative enterprise doing business in Cyprus(spent 10% of its operating capital on research and development in at leastone of the last 3 years):

– it must be an unlisted company not operating in any market; or– if operational, it has been operating in any market for less than 7 years; or– it is a "follow-on investment", requiring an initial risk finance investment which,based on a business plan prepared in view of entering a new product orgeographical market, is higher than 50% of its average annual turnover for thepreceding 5 years

Cyprus

2

• Personnel performing R&D & creating IP, software

• Ownership for IP• Innovative SMEs

Russian Parent Co EU or CY Parent Co

CY IT Co CY Holding/IP Co

Subsidiaries in EU & non-EU states

Dividends

Royalties

Low tax Parent Co

CY Start-up Co

Some tax policy challenges for the “technological tax havens”

2

1) Comparative analysis of the selected “tax hubs’” approaches towards taxation of the income obtained with the use of the advanced technology proves that this area is the space of international tax competition, where the combination of tax incentives for MNEs and start-ups, transfer pricing rules, rules for valuation of IP are used by the countries in order to win in the global economic battle for the most advanced parts of the digitalized value chains;

2) Countries use different approaches and apply tax policy measures differently trying to maximize their already existing economic advantages. Some countries focus more in stimulating narrow areas

• Malta – blockchain and online gambling in EU;

• Hong Kong – advanced manufacturing and blockchain projects in China; Cyprus – attracting IT businesses and investments from the former USSR countries),

• Netherlands, Singapore – broader R&D and IP for global exploitation;

Some tax policy challenges for the “technological tax havens”

2

3) In relation to IP some countries develop very detailed and even pioneering (Netherlands) methodology for valuation and assessment of transfer pricing for intangibles incorporating BEPS Action 8 recommendations (Netherlands, Singapore, Hong Kong).

• This is explained by the idea that strong TP rules are key when resolving disputes with other states for the global tax base taxed at these jurisdictions at lower rates;

• The acquired IP valuation shall be supported, for example, by the auditor’s valuation report (Singapore) or by TP analysis (Netherlands). There are even limitations on deductions for acquiring IP from the related party (Hong Kong, but not Singapore). Other analyzed states (Malta and Cyprus) don’t have detailed transfer pricing methodology;

4) Hong Kong and Singapore already have territoriality as their main advantage, however, providing tax incentives in the territorial tax jurisdiction in relation to activities performed outside this jurisdiction can raise the question of inconsistency between the scope of regime and the scope of tax benefits in the context of harmful tax competition;

Some tax policy challenges for the “technological tax havens”

2

5) Economic & legal rights for IP is crucial for obtaining the tax incentives (Netherlands, Cyprus, Hong Kong). IP incentives after the BEPS Action 5 inevitably need some substance like key people’s functions in relation to IP creation & supervision: both in-house & outsourced;

6) Therefore, also tax incentives for attracting qualified expats are introduced (Netherlands, Malta, Cyprus, Singapore) which raises the problem of neutrality & equity;

7) In the international context wage tax incentives can be more beneficial for subsidiary of the MNE with parent in the US (which taxes worldwide profits of its active subsidiaries) than corporate income tax deductions;

7) Methodological approaches to taxation of the new distributed ledger assets shall be in line with the existing tax methodology and based on the economic nature of the assets and transactions (Malta)

2

Many thanks for Your attention!

MILOGOLOV NIKOLAI, ADIT, candidate of sciences (econ.)Tax Policy Centre, Financial Research Institute (Moscow)nmilogolov@nifi.ru