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. Last Updated: 07/27/2016

U.S., Russia Cooperate To Catch Tax Cheats

The United States and Russia, under the terms of a new treaty that took effect this year, will automatically swap certain tax information on U.S. citizens living in Russia in an attempt to crack down on tax cheats, tax officials said. The new Russia-U.S. double taxation treaty, which became effective Jan. 1, provides for both countries to exchange regularly some information from tax returns. According to Joe Hook, the head of the U.S. Internal Revenue Service office in Bonn, the United States will send to Russia information on U.S. income from dividends and interest and other passive earnings for those U.S. citizens living in Russia. "We will automatically pass that information on to the Ministry of Finance," said Hook, who was in Moscow last week in connection with the coming June 15 deadline for U.S. expatriates to file their U.S. tax returns. Hook said that information on wages earned will not be passed on automatically, although it will be furnished if requested. The exchange of information is part of a growing effort on the part of the Russian government to shore up its budget deficit through increased enforcement. Many foreigners so far have avoided paying Russian taxes but Western tax specialists warn that the Russian government is tightening its net. "Russian tax inspectors are getting more vigilant," according to Jessica Perera, tax manager at the accounting firm Ernst and Young. The treaty protects citizens of the two countries from having to pay taxes on the same income to both countries. In addition to paying Russian taxes, U.S. citizens living abroad must file U.S. income tax returns, whether or not they owe taxes.For Russia's part, it will provide information to the IRS on the financial activities of American businesses and individuals in Russia and with the dealings of U.S.-based companies with Russian firms, Hook said. While under the treaty both governments may request and receive individual tax returns, Hook said that filings will not be exchanged regularly. The United States has similar agreements with about 40 countries, Hook said, but some Western tax specialists in Russia said it was not standard practice for that information to be exchanged annually and automatically. "It surprises me we would just send them a tape with all of that information automatically," said Byron Ratliff, a tax specialist with Price Waterhouse in Moscow. The specialists said they had understood that under such treaties the U.S. government only furnished such data when it had been specifically requested by a foreign government that had detailed the reasons for its request. Under Russian law, a person's worldwide income, including, for example, interest earned in a U.S. bank account, is subject to Russian tax. However, Russian officials have often not assessed taxes on that money because they have recognized that the earnings would be taxed in the United States. Under the treaty, Hook said, the United States gets the first bite out of U.S.-sourced income. One exemption from Russian income tax remains in effect through 1994. A two-year tax holiday for American journalists and a limited number of contract employees working with the Russian government in certain industries will continue until the end of the year. The tax treaty, which replaces a 1973 agreement, was designed not only to help catch tax evaders, but also to spur trade and investment. Under the treaty, companies with 30 percent U.S. ownership and $100,000 or more in start-up capital can deduct interest expenses without limit. Such deductions are limited by Russian law for other companies. Russia is renegotiating its double taxation treaties with other Western and Asian countries on the American model but only a recently renegotiated treaty with Poland has taken effect. All foreign residents of Russia, legally defined as living in Russia for more than 183 days of a year, are required to pay Russian taxes on all income earned both in Russia and abroad, according to Konstantin Ivansov, the senior inspector in the department of international tax payment in the Russian Tax Inspectorate. Russia has a tax rate of 30 percent for annual salaries over 10 million rubles ($5,000). Salaries from 5 to 10 million rubles are subject to 20 percent rate. Unlike in the United States, Russia allows few deductions from gross income for tax purposes, meaning that Russian taxes could often be higher than in the United States where most taxpayers pay between 15 percent and about 30 percent. Russian tax forms can be obtained at the Moscow State Tax Inspectorate, located on Ilinka Ulitsa, number 13, according to Perera. U.S. tax forms can be obtained at the American Embassy.