Updated: May 18, 2022

We continue to monitor the U.S.-Russia tax treaty withdrawal along with economic and  trade sanctions. It’s a constantly developing situation that profoundly affects global business and cross-border tax collection. Following is an update to IWTA founder Jack Brister’s  article published in JD Supra on March 18, 2022.

New Developments

 The Biden administration is poised to fully block Russia’s ability to pay U.S. bondholders. A temporary exemption deadline that gave Moscow leeway to pay coupons in dollars expires on May 25, 2022. The move could bring Moscow closer to the brink of default, Treasury sources told Bloomberg.

Tax Treaty Revocation in Action

The U.S. government had already been putting pressure on Russia. On April 5th the Treasury Department told multiple news outlets that it had suspended its tax information exchanges with Russia. That decision essentially blocks Russian authorities from obtaining tax information from the U.S. that would help their domestic collections, which could be a strong economic blow to the country.

Frozen: How the Revocation of the U.S. – Russia Tax Treaty Puts Global Trade on Thin Ice

Originally published on March 18, 2022 on JDSupra.

Permanent Normal Trade Relations (PNTR), commonly known as a nation’s most favored (MFN) status has been used in trade treaties for years. Using the MFN clause requires that a country that provides a trade concession to one trading partner must extend the same treatment to all of its partners. Used by the World Trade Organization the loss of this status can expose a country to discriminatory import tariffs.

Through the MFN status, the 164 members in the World Trade Organization treat each other equally, benefitting from highest import quotas, lowest tariffs and fewest trade barriers for goods and services. Members are allowed to impose whatever trade measures they wish on non- members, within reason. In addition, Biden announced that the G7 was seeking to ban Russia’s borrowing from the IMF and the World Bank. By revoking Russia’s MFN status, the United States and its allies send a strong signal that they no longer consider Russia an economic partner.

But the losses will go farther than Russia. The resulting tariffs will also raise costs for Americans and trading partners that may rely on affected Russian products. The United States is somewhat reliant on commodities exported from Russia, including fertilizers and base metals and the specific import restrictions will determine the impact of the sanctions.

What Are the Tax Implications of a Revoked U.S. – Russia Tax Treaty?

In tax treaties, the MFN clause promotes non-discrimination and parity for treaty partner countries. The main purpose of a tax treaty is to ensure proper tax treatment of monies earned by citizens, expats and residents of each other’s country. At present, the tax treaty between the United States and Russia is still in place, however, the US Senate Foreign Relations Committee has proposed a review of the US-Russia tax treaty.

Without the treaty, Russian investors with U.S.-sourced dividends would not only face a 30% withholding tax rate, they would also lose preferential treatment. The impact could be as great for American businesses in Russia as it is for Russian businesses. However, the ability to have offshore holdings in haven jurisdictions as well as the option of using cryptocurrencies for transactions, revocation of the tax treaty may not be as effective as it looks on paper..

Proposed tax changes aimed at penalizing the Russian government and Russians subject to sanctions who own U.S. assets is also in play. The plan, by Senate Finance Committee Chairman Ron Wyden (D., Ore.), would look to remove foreign-tax credits and certain deductions for U.S. companies earning income in Russia and Belarus.

We advise clients with business and investment ties to Russia to keep in touch as we continue to monitor the breaking developments in this unprecedented time of turmoil.