Legalization, also known as capital amnesty, is an economic mechanism, which, in fact, is a kind of agreement between the state and business entities or citizens, which allows building relationships between the parties from scratch. The success of the procedure depends on the level of trust between the parties. Legalization of both income and property is a preliminary stage of declaration. The state allows all residents to legalize all their income without suffering any punishment or penalties. In this format, individuals and organizations are able to clear their history and eliminate a number of errors. There are a lot of amnesty mechanisms. Legalization may be accompanied by income tax or not. Parallel implementation of fiscal reforms or their absence, liberalization or tightening of tax administration standards is allowed.
Amnesty around the world: America and Switzerland
Amnesty of capital is a procedure of legalizing property, the history of which began back in the 20s in the 20th century. The procedure was first proposed by the US government almost immediately after the end of the Great Depression and after the repeal of Prohibition. It was during that period that the American government invited citizens to register their income from the illegal sale of alcohol. Switzerland was the first to practice the procedure in Europe. After the end of World War II, it was here that the registration of the Third Reich capital was carried out.
The mechanism for the implementation of the amnesty, the conditions for its implementation and the effect of it on each of the countries are individual. But the essence of the process is reduced to forgiveness by the state to taxpayers of all their debts. Such encouragement of the government allows attracting very large capital from the shadow sector of the economy to the state budget.
One of the most successful amnesties in history.
In 2001, a full amnesty of capital was carried out in Kazakhstan. She was one of the most successful procedures that took place in the territory of the post-Soviet space. Over the course of a month, about $ 480 million was deposited into specialized accounts in 16 banks. The state guarantee was the destruction of the documentation of taxpayers who took part in the legalization of their own free will. In parallel with the amnesty, the country reduced VAT by about 4%. Social tax decreased by 5%. So that the returned money does not lie idle, the government issued special government securities. It was amnesty funds that helped Kazakhstan eliminate the consequences of the 1998 crisis.
A new breakthrough in the Turkish economy
Amnesty of capital is an economic procedure that is carried out from time to time in almost all countries of the world. A vivid example of how the legalization mechanism should work is considered to be Turkey. To date, five successful amnesties have already been conducted in the state. The legalization process was first launched in 1998, which was the period when the new economic era began. The materiel received in bank accounts was not taxed, and no one was interested in their origin. The result of government action was $ 20 billion in bank accounts.
Unsuccessful Amnesty: Russia, Georgia and India
Amnesty of capital in Russia in 2007, in India and Georgia, turned out to be the most unsuccessful in the entire history of the existence of legalization. So, in India, tax authorities became interested in the origin of capital during the amnesty, which allowed them to enrich the budget by only 2.5 billion dollars. The fact that in a multimillion-dollar country only 5% of residents pay income tax is striking. A similar procedure in Georgia attracted the attention of only eight people and a capital of $ 35 thousand. Separately, we can say about Russia, where citizens and commercial organizations were invited to legalize their profits by paying only 13 percent of income tax. The response from society did not work out that way.
What is the secret to the success of the amnesty?
The financial amnesty should be accompanied by a powerful legislative framework, which, unfortunately, is absent in Russia. Any project should be worked out in detail and take into account all the interests of entrepreneurs, businessmen and individuals. In history, the successful processes of legalization of capital were accompanied by important points:
- Exemption of project participants from the need to file a declaration and pay tax arrears.
- An audit of funds is not required.
- Complete liquidation of tax debt records, penalties with fines on assets.
- Confidentiality of information regarding the directions of movement of assets before tax authorities and other regulatory structures.
- All funds or property that will be included in the income declaration form will be registered through special institutions. Information for tax authorities will remain confidential.
Attractive amnesty conditions for optimal effect should be accompanied by tougher penalties in case of violation of tax legislation. This can be either confiscation of property or an increase in fines.
Amnesty of capital in Russia in 2015
At the beginning of December 2014, the Russian government began to conduct active discussions about the amnesty of capital. The issue in the future will affect not only people who evaded taxes, but also those who committed a certain category of financial crimes. Despite skepticism on the part of the public, according to the government, for Russia, an amnesty of capital is an opportunity to help its wealthy citizens, who, due to sanctions from the West, undergo certain inconveniences saving their capital abroad. According to Putin, this measure will be voluntary and will make life easier for many “strong” Russians. According to experts, the economic situation in the country will become a powerful foundation and prerequisite for the fact that legalization once again simply failed.
Inconsistency in the legislation of Russia
The expanded amnesty, which is planned to be launched starting May 9, 2015, does not yet have reliable legislative support. There was information that the planned procedure is inherently completely contrary to international standards for combating money laundering. Trying to save the situation, the president continues to actively promise fundamental changes in laws that will not contradict the FATF rules. To date, several bills have been submitted to the president for consideration, but each of them does not yet provide guarantees in terms of the safety of persons who accept the conditions of legalization. It is also worth noting that wealthy citizens of Russia, having exported their capital abroad, continue to partially invest in the domestic economy under the guise of foreign investment. They are of little interest in the financial amnesty as such, since it is not in a position to offer a specific package of benefits at the moment.
Why can an amnesty in Russia fail?
The financial and credit amnesty in Russia has a very low chance of success. The main reason for the disappointing forecast lies in the mistrust of government decisions, which are supposedly aimed at improving the lives of citizens of the state. On the account of the government are Khrushchev’s freezing of Stalin’s bonds, and Pavlov’s reform, which deprived the population of savings, and the monetization of benefits has not yet become a thing of the past. There is simply no guarantee that the authorities will radically change their decisions to the owners of the amnestied capital after several years. Security of persons will be maintained only until Putin is the current president of the state. The amnesty of capital is not very attractive also because the country's law enforcement apparatus is more corrupt. If people begin to declare at their request that they have large capital, they will be the first to be hit. The government is not able to provide a decent level of protection against fraudsters. There are high risks that amnestied capital may be banned in foreign jurisdictions.
The history of failed amnesties in Russia
An active discussion of deoffshorization in business and government circles does not change the fact that the law on capital amnesty is currently not adopted and approved. No one is able to provide firm legal guarantees to people who decide to participate in an amnesty. There are already cases in the history of the state when the government had to face setbacks, precisely starting from poorly done work in the field of legislation. So, in 1993, after the adoption of the law on tax amnesty, no activity on the part of the population was observed. People refused to be released from liability for tax evasion by making all debts in the country's budget. The second wave of amnesties is an attempt to legalize real estate and income in 2002. The bill, which was supposed to confirm the state’s plans, was never passed. The third step is the credit amnesty and tax, which took place in 2007. The country's government does not want to learn from mistakes and follow the successful experience of other countries.
What is missing for a successful domestic amnesty?
The main drawback of the coming domestic amnesty is the inability of the state to provide security guarantees for each of its participants. Despite the fact that more than one bill has already been submitted for consideration, this factor has not been considered in detail in any of them. The financial stimulation expressed by the tax payment procedure (2.5% on the returned capital) is supported by the absence of judicial and administrative responsibility. The problem is that payers will be forced to independently calculate this tax at a rate of 2.5%, which may cause some inconvenience.
Minor flaws
In each of the bills submitted for consideration there is no such item as the legalization of capital issued to a third party. It is not foreseen to enter data on real estate and other property in the declaration form on income from a third party. There is no clear list of articles according to which a person will be released from liability. Not specified moments regarding the prosecution of people who previously committed tax crimes.
