Offshore jurisdictions are located all over the world, often their status is reduced to the fact that the business taken out to offshores is distanced from the Ukrainian authorities, and the tax expenses are kept to minimum. There are many advantages of "offshores": the use as intermediary companies in withdrawing funds for tax optimization, fast and free disposal of foreign currency without the control of "domestic" supervisory authorities, protection of assets located in Ukraine and contracts concluded by international law, confidentiality of information about real owners, business structuring, etc.
At the same time, respective jurisdictions are often recognized by international organizations and individual states as those that do not meet their defined criteria for transparent taxation, anti-money laundering, terrorist financing and even pose a threat to the international financial system. This lays the appropriate risks of cooperation with entities from these jurisdictions, and in some cases with related parties and their counterparties as well. First of all, it is so from the point of view of national and international restrictive policies that can be applied to such subjects and/or their partners.
The overall objective of the EU lists is to improve the proper tax settlement around the world and to ensure that the EU's international partners adhere to the same standards as the EU member states on tax transparency, fair taxation, and implementation of financial security measures. List criteria have been agreed by Member States in 2016. The "black list" includes countries that have not taken sufficient measures to change legislation and to combat tax evasion at the request of the EU. The "grey" list of the EU includes countries that do not yet meet EU requirements, but have shown that they are ready to change and comply with tax transparency and honesty. As for specific sanctions against countries and their residents, no specific EU decisions have been made, but falling into the "black list" itself can bear reputational risks. In addition, both individual EU Member States and other States and entities can introduce their own restrictive policies with respect to the jurisdictions and/or their residents listed.
To protect the international financial system from the risks of money laundering and terrorist financing at the international level, the Financial Action Task Force on Money Laundering (FATF) has identified a list of jurisdictions whose national anti-money laundering and terrorist financing regimes have strategic weaknesses that threaten the international financial system. This is the so-called "black list". FATF strongly recommends all states to pay special attention to their financial institutions for business relations and transactions with companies and financial institutions with a "black list" jurisdiction, as well as to the need for enhanced verification of clients when carrying out transactions with entities from these jurisdictions and related persons. The United Nations, the EU, the United States and several other countries and international organizations are taking appropriate sanctions against individuals cooperating with residents from the FATF blacklist. Banks and other financial institutions (including Ukraine) block financial transactions of clients with contractors associated with entities from the "black list" of FATF. Cooperation with contractors, whose partners are persons from these jurisdictions, can be the object of increased attention of the state supervision (control) authorities, and also attract the attention of law enforcement bodies and bear reputational risks.
FATF has also identified a list of jurisdictions which national anti-money laundering and terrorist financing regimes have strategic flaws subject to review by FATF in accordance with agreed milestones and deadlines. This is the so-called FATF "grey list". The FATF recommends all states to pay special attention to their financial institutions to business relations and transactions with these jurisdictions, including their companies and financial institutions, and to the need to verify the client when dealing with entities from these jurisdictions and related persons. Banks and other financial institutions (including Ukraine) conduct financial monitoring of transactions with contractors associated with entities from the FATF "grey list" and, depending on monitoring results, may block financial transactions. Cooperation with contractors partnering with persons from the specified jurisdictions may itself bear reputational risks. It is also possible that individual member states of FATF and other states and subjects of the law may impose restrictions on their own entities and/or their partners.
The Organization for Economic Co-operation and Progress (OECP) has produced internationally agreed standards for the exchange of information on request (EOIR) for tax purposes. OECP carries out a rating of jurisdictions on compliance with these standards and the existence of risks associated with compliance with tax laws. Cooperation with contractors, partnering with persons from jurisdiction, do not meet the specified standards (the so-called "black list" of the OECP") itself can bear reputational risks. It is also possible that individual OECP member states and other states and subjects of law may impose restrictions on their own entities and/or their partners. Sanctions against any entities due to their belonging to the OECP "grey list" (jurisdictions that partially comply with the standards of information exchange for tax purposes) and/or their partners do not exist. At the same time, cooperation with contractors, partnering with persons from jurisdiction, do not fully comply with the standards of transparency of the OECP tax information clearly can not be considered an advantage.
In 2017, the Tax Code of Ukraine (Article 39) clarified the calculation of income tax in transfer pricing. On Dec. 27, 2017 the Cabinet of Ministers of Ukraine adopted a new List of relevant states (territories). This list includes 63 of 65 offshore companies defined by the previous List of Offshore Companies (Order of the Cabinet of Ministers of September 16, 2015, No. 977-r was canceled), as well as a number of other states/territories (85 in total). Some of these states are not "classical offshore companies" in the conventional sense, however, belonging of the non-resident contractor to them is a sign for classifying economic transactions with it as "controlled" and applying the relevant principles of tax adjustment. Initially, Bulgaria, Georgia, Estonia, Latvia, Malta, and Hungary were included in the List, but subsequently they were excluded by the Cabinet of Ministers Decree No. 108 dated 31.01.2018, dated 11.04.2018 No. 295.
In accordance with the procedure for conducting counter-checks by the controlling authorities (Cabinet of Ministers Decree No. 1232 of December 27, 2010), the controlling authorities may conduct the necessary counter-checks to obtain tax information needed when conducting taxpayer audits. In particular, regarding contractors participating in the supply chain of goods (works, services) that are the subject of controlled operations. Information obtained as the result of such checks may be the basis for conducting appropriate unscheduled inspections and/or appealing to law enforcement agencies.
In accordance with paragraph 1 of the first part of Article 15 of the Law of Ukraine “On Prevention and Counteraction of Legalization (Laundering) of Proceeds from Crime, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction” to include states in the list of offshore zones in accordance with the annex of the Cabinet of Ministers "On the classification of states to the list of offshore zones" dated 23.02.2011 No. 143-r for the purposes of financial monitoring, includes some states to offshore zones.
Banks and other financial institutions of Ukraine carry out financial monitoring of transactions with contractors from these jurisdictions and, depending on the results of monitoring, have the right to stop the implementation of the financial operations for 2 business days. The State Financial Monitoring Service, in case of suspicion, may decide to suspend expenditure financial transactions for up to 5 business days. In addition, if the State Financial Monitoring Agency suspends financial operations, the law enforcement agencies authorized to make decisions in accordance with the Criminal Procedure Code of Ukraine are immediately notified. Thus, cooperation with contractors, which include individuals from the "offshore list" of Ukraine, can attract the attention of law enforcement agencies and bear reputational risks.