Efficiency 2015 Annual Report

It is Time to Relocate to the Gulf of Riga

It has been said that the future of Latvia’s financial export depends on the ability of government and banks to provide an alternative to offshore jurisdictions. Vadims Reinfelds, ABLV Bank Deputy Chief Executive Officer, explains the ongoing changes and what they are leading to.

What will change in business organization for clients working in international trade?

There will be serious changes in international business; the process has already begun. For a long time, the base operating principles of this field had not changed; especially in regard to trading business. However, in the next 2–3 years, we will witness a significant change in the way how international companies conduct their operations. We, bank employees, closely monitor all the changes in regulations, and we cannot agree with the opinion that they are primarily evident in the CIS states. The main initiators of the changes are the largest economies of the world, which have united under the Organisation for Economic Co-operation and Development (OECD). Truly revolutionary changes are taking place in the western countries, which will primarily impact large international companies.

Could you briefly explain what these revolutionary changes are?

First of all, it is a fight for the tax revenue. It all began with the American FATCA law, within which an exchange of information is conducted with the USA. Since 2016, an automatic exchange of information has been introduced in the EU, which may affect the operations of international banks, especially those whose business models rely on servicing foreign clients.   

The OECD has prepared a programme for combating base erosion and profit shifting (BEPS). The programme’s action plan thoroughly describes the recommendations for OECD countries to globally combat “harmful” tax optimisation. At the same time, numerous countries are implementing or increasing the control of foreign companies to tax the passive incomes of foreign businesses.

Why did the principles of conducting foreign business start to change after a relatively long period of tranquillity?

There are two fundamental reasons. First, countries are still recovering from the world crisis of 2007.  The prolonged recession is continuing — almost all countries are suffering from budget deficits. Because of the adverse economic background, the governments have begun paying more attention to large companies with intent of making them pay more taxes.

Second, business globalisation is playing a big role. Nowadays even a small business can decide in which country to launch manufacturing, conduct research, set up warehouses and control logistics. Modern technology makes these tasks trivial. For example, Amazon can locate its warehouse in the UK, management, website and patents in Luxembourg, and its program development centre in the USA. This raises the question of which country should get the revenue tax of this international company? When the tax administrations began looking into the structure of such companies, they concluded that the companies could legally optimize the taxation by moving parts of their business to jurisdictions, where such business receives tax incentives.

In the UK, business ethics are being discussed at a political level. Is it ethical that an international company makes profits in the country, but does not pay income tax, especially when the host country is going through some rough times? Governments think that this is not fair.

But if most of the changes affect large countries, small countries can profit by creating privileged tax regimes, thus attracting taxes from large businesses to sustain their economic activity. Is it possible that this affects CIS states to a lesser degree?

No. The essence of the globalisation of the economy is the fact that any legal initiatives can only be effective if they are implemented globally. If the western countries implement the changes, but they are not applied to developing countries, there is a chance that the companies will simply move. To avoid this, the major countries are pressuring the small ones. The second negative result of globalization is that the crisis in the West is also affecting CIS countries. For example, the decline in global demand instantly lowers the price of raw materials.

How can an entrepreneur figure out these changes on his own?

Although tax incentives notably affect international business; they are not the only factor for our clients. It is also important that the companies of our clients have grown and become more stable, so they can prioritize other tasks. If you abandon the opaque entity, the risks will diminish and it will be easier to provide legal defence, which will increase the value of the enterprise. Besides, fundraising will become easier and spending will decrease.

The business cannot be located on a “virtual cloud”; it has to have an actual location.

So, is an enterprise forced to change under the pressure of external factors?

Despite the tax initiatives that significantly influence the international business, this is not the only factor that matters for our clients. The key aspect is that our clients’ companies have gained ground and business has stabilised, therefore new priorities set different tasks. If you have a transparent structure, your risks will be reduced, legal defence will be easy to ensure, and thus the enterprise value will significantly grow. Fund raising will become easier and expenses will diminish.

As far as I understand, the bank has some offers to make to entrepreneurs, who want to “cast their anchor” in a safe spot?

Yes. There are several ways to do this. One of them is to use the holding company model. This method should be applied to gain a competitive edge. The second one is to use trading companies registered in Latvia. They are very convenient to use for exporting from the CIS countries or importing into them.
In my opinion, this should be the basic solution for the clients of Latvian banks. Above all, banks can render a broader range of services to locally registered companies to develop financing more actively.

Why is it more beneficial to register a company in Latvia than in any other European country, for example, in Switzerland?

There are several reasons and not just a geographically favourable location and a qualified Russian-speaking workforce. Entrepreneurs who have opened trading houses in Switzerland will notice the differences instantly. The expenses of running a business are a lot lower — premises, workforce, B2B services and flights are cheaper. At the same time, all the necessary resources are available, the infrastructure is well-developed; telecommunications and internet services are great even by western standards. The political risks are also low here. In other words, Latvia’s low expenses and the well-developed infrastructure are the reasons why the business centres of many international companies are moving here including hotlines, telemarketers, call centres and help desks.

The expenses of running a business in Latvia are a lot lower than in Switzerland — among other things, premises, workforce, and flights are cheaper here.

Moreover, the income tax rate is one of the lowest in the EU…

Exactly. The transfer of business management structures to Latvia is already a choice worth considering for several reasons. At the same time, it is necessary to actively attract and transfer the businesses to Latvia on a governmental level, promoting all-around economic development. Obviously, these business structures will use the services of various professionals including accountants, legal experts; the office premises sector and IT will progress, too. In addition, when trading houses or the telemarketing structures start successfully operating in Latvia, eventually some businessmen will relocate their logistics departments here, and maybe the processing, too.

And then they will move to Latvia?

That would only be logical. We can already observe this trend: entrepreneurs and some not so well-off artists are transferring their personal tax residencies to Latvia. There are plenty of reasons to move to Riga including the simple, cultured and safe environment, the availability of services, low political and tax risks. Riga is slowly becoming an intellectual centre. History is repeating itself; not so long ago many intellectuals and merchants from the Kingdom of Sweden and the Russian Empire made Riga and Jurmala — cities that were safe for living and doing productive work — their havens of refuge, if not permanently, then at least temporarily.

Table of Contents

Creative team: Arnis Artemovičs, Ernests Bernis, Jānis Bunte, Anna Celma, Ilmārs Jargans, Jekaterina Koļesina, Sergejs Mazurs, Samanta Priedīte, Jūlija Surikova, Romans Surnačovs
Project managers: Anna Celma, Jūlija Surikova
Interviews: Jānis Bunte, Ingrīda Drazdovska, Konstantīns Gaivoronskis, Katrina Gordejeva, Ilmārs Jargans, Jekaterina Koļesina, Sergejs Mazurs, Romāns Meļņiks, Sergejs Pavlovs, Romans Surnačovs, Jānis Šķupelis
Text authors: Leonīds Aļšanskis, Jānis Bunte, Anna Celma, Vladislavs Hveckovičs, Jānis Grīnbergs, Māris Kannenieks, Ļubova Kazačenoka, Jekaterina Koļesina, Zane Kurzemniece, Aleksandrs Pāže, Gints Pumpurs, Dmitrijs Semjonovs, Jūlija Surikova, Kaspars Vanags, Benoit Wtterwulghe
Photography: Arnis Artemovičs, Uldis Bertāns, Mārtiņš Cīrulis, Ieva Čīka, Krišjānis Eihmanis, Andrejs Hroneloks, Alise Jastremska, Valdis Kauliņš, Valts Kleins, Marks Litvjakovs, Sergejs Mazurs, Reinis Oliņš, Samanta Priedīte, Gatis Rozenfelds, Polina Viljun, LETA foto, Marka.photo, Studija F64
Proofreader: Jānis Frišvalds
Translators: Jekaterina Koļesina, Nataļja Malašonoka, Lidija Marsova, Jūlija Surikova
Design: Aivis Lizums, Valters Horsts

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