This week in tax: Channel Islands issue warning over Russia sanctions
Russia is facing several economic sanctions for its invasion of Ukraine. UK sanctions will depend on action in low-tax jurisdictions such Guernsey and Jersey to restrict Russian capital.
Regulators in the Channel Islands have warned financial institutions to uphold UK sanctions on 18 specific Russian individuals and businesses with holdings in those jurisdictions. This is on top of hundreds of other individuals and companies hit by sanctions going back to 2014.
The Crown dependencies have consistently stressed that they will enforce all UK sanctions, alongside EU and UN sanctions. However, the UK government faced criticisms from the opposition that it was not going far enough in reaction to the invasion of Ukraine.
Low-tax jurisdictions such as Guernsey, the Isle of Man and Jersey have long been key offshore centres for businesses and individuals. After the collapse of the Soviet Union, Russian individuals and companies have amassed a huge amount of wealth offshore.
One 2018 Global Witness report found that Russian oligarchs had an estimated £34 billion ($45.5 billion) held in UK tax havens. However, the wealth is not just held in the three Crown dependencies. The report found that the British Virgin Islands (BVI) was the second most popular destination for capital leaving Russia – second only to Cyprus.
The UK government secured support from the three Crown dependencies and 14 overseas territories, including the BVI, to enforce its sanctions ahead of the invasion.
However, the sanctions on specific individuals and businesses have a limited scope. Furthermore, entities in these jurisdictions are not easily traced back to their owners, so it is possible that Russian oligarchs and banks are able to play the system. ITR will be keeping an eye out for tougher measures.
India’s crypto tax policy lacks ‘nuance’
India’s digital asset tax announced in the 2022 budget offers certainty for market participants, but tax directors demand more clarification on the treatment of losses, as well as tax deducted at source (TDS) treatment and the definition of virtual digital assets (VDAs). The tax framework could also impose an unfair tax treatment on investors in cryptocurrency.
“A framework that taxes any asset at 30%, disallows any deduction apart from the cost of acquisition and disallows set off or carry forward of losses is not designed to impart fair treatment to players in that segment,” said Yeesha Shriyan, research fellow at the Vidhi centre for legal policy.
“It will affect persons engaged in short term trading booking petty percentage profits, arbitrage traders, developers, and independent freelancers working for overseas employers who were paid their salaries in cryptocurrency will also be impacted,” she added.
This year’s budget – announced on February 1 by finance minister Nirmala Sitharaman’s – introduced key tax reforms including the taxation of digital assets such as non-fungible tokens (NFTs) and crypto.
Under the change, gains obtained from the transfer of such assets will be taxed at 30% with a withholding tax of 1% above the monetary threshold. No deduction will be granted and investors incurring a loss will not be able to set it off against another income.
The tax on income from the transfer of digital assets will come into effect on July 1. The withholding tax regime will be effective from July 1. However, tax directors have claimed the reform could present a significant disadvantage for taxpayers despite more certainty.
MP Margaret Hodge demands decisive action to combat illicit funds in the UK
The UK has already implemented Magnitsky-style sanction regimes including the Sanctions and Anti-Money Laundering Bill, which aimed at guaranteeing compliance with international obligations. However, British Overseas Territories (BOTs) have not yet implemented the legislation, which would allow them to obtain more information about registered companies.
Despite the UK endorsing a number of bills against financial crime, it is still considered a prime hub for money launderers due to the lack of law enforcement and resources given to regulatory agencies. MP Hodge tells ITR that transparency must be reinforced to prevent illicit funds from coming into the UK.
In January, the UK government denied accusations that it had stopped the implementation of the Economic Crime Bill following criticism of the bill from MPs. This denial was good news for advocates of tougher anti-money laundering regulations. Yet the register of beneficial ownership (RBO) has still not been adopted by BOTs and Crown dependencies, and it remains a key loophole that must be closed.
A House of Commons Committee report, published on February 2, claimed that economic crime was not a priority for law enforcement. The report also registered disappointment that the Registrations of Overseas Entities Bill had not been introduced, more than five years after it was promised by the government.
ITR’s Leanna Reeves spoke to MP Margaret Hodge to discuss how the UK must act against the increasing flow of dirty money coming into the country’s economy.
Next week in ITR
ITR will be revisiting EU policy on non-cooperative tax jurisdictions. The European Union has started screening several jurisdictions for its black and grey lists, including Israel, Russia and Vietnam.
Israel and Vietnam are being screening over how they will comply with the Inclusive Framework recommendations from October 2021. Meanwhile, Russia is being screened over its special administrative regions.
At the same time, ITR will continue its Global Tax 50 series with a profile of German Chancellor Olaf Scholz. The Social Democratic Party (SPD) is in power for the first time in almost two decades. Germany is set to enact digital tax reform and raise carbon taxes, but the energy crisis poses a difficult obstacle.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.