Comparative analysis of tax regimes of international financial centres

Here, as in a number of "classic" offshore zones, transnational corporations (TNCs) are largely or completely exempted from taxation. Most of such territories are former British colonies or other dependent territories. Their legislation is often based on pre-existing regulatory documents of developed countries and gravitates to the British model of law.

Tax regime

The government stepped up tax policy in relation to general taxation of income, in order, firstly, to reduce the tax burden on private business and, secondly, maintain international competitiveness among the countries attracting foreign capital. The liberal nature of corporate taxation has been further intensified after a series of reductions in corporate income tax rates. In 1988, the rate was sharply changed - from 40 to 33%. In subsequent years, it repeatedly dropped: in 1990 - up to 32%, in 1991 - up to 31%, in 1992 - up to 30%, in 1993-1995 - up to 27%. In 1995, it became one of the lowest in ASEAN. Nominal tax rates on personal income have also undergone some changes: in 1981, the lowest rate was 4%, upper - 55%. After several decreases, the rates changed significantly and in 1994 were set at 2.5 and 30%, respectively. The government continued to liberalize taxation in the 2000s. Corporate tax rates decreased from 26% in 1999-2000 down to 22% in 2003-2004, 20% in 2005-2007; down to 18% in 2008-2009 and to 17% in 2010-2020.

The government has embarked on such drastic tax reforms under the influence of external circumstances, in particular, significant changes in corporate tax rates in developed countries, primarily in the USA and Japan.

Singapore uses the territorial taxation principle [PWC, 2020]. Individuals are taxed on income earned on its territory. Non-residents of the country are not taxed. Capital gains are not taxed. Given that income earned outside of Singapore is tax deductible, income that is also tax deductible in another country, may result in being completely tax free. Main sources of financial revenues for the budget are the following: income tax on citizens and corporations, real estate tax, customs duties, vehicle tax. Other income - interest on government loans and significantly sized fines.

Tax incentives were introduced for a number of companies. In particular, newly created firms, established since 2005, receive the right to full exemption from corporate tax for three years. In 2010, this benefit was extended. These tax benefits once again showed how fast and pragmatic government responds to changes in external environment, in particular for global rate cuts corporate tax. This was necessary in order to attract foreign direct investment in the context of deepening globalization.

For some types of activities, “holidays” on income tax can be prolonged for up to 10 or even 15 years. If the company is going to introduce new products to the market or use advanced technologies for the production of an already well-known products, it is assigned the status of a pioneer company. All such companies are completely exempted from the income tax for a period of 5 to 10 years, depending on the industry. And after this period, companies have the right over the next 5 years to pay income tax at a rate twice as low.

This type of `friendly attitude' of the state can also be noted towards companies from abroad. To attract large foreign firms to the country additional benefits were introduced. All multinational companies that open their headquarters in Singapore, for the first 10 years of operation can pay income tax at a rate of 10%. The government extends this period for corporations with great reputation. According to a decree from the Singapore Internal Revenue Service, a properly structured Singapore company is exempted from taxes on profits earned outside its borders. As well as taxable profit of 100 thousand Singapore dollars (about 80 thousand USD) received in the first three years of operation of the enterprise is not subject to taxation. Since 2008, a 50% tax exemption has been approved for the next 200 thousand Singapore dollars. According to a regulation by the Singapore Internal Revenue Service, Singapore companies are required to register as a payer of value added tax if the annual sales revenue exceeds 1 million Singapore dollars. The Singapore government is refunding value added tax to non-resident companies. For companies with an annual turnover of less than 5 million Singapore dollars (about 4 million USD) an annual financial audit is not a mandatory procedure. In addition, international trading companies have an opportunity to receive a 5- or 10-percent tax rate for the period of three or five years within the Global Trader Programme of Singapore [Singapore Government Agency, 2020]. This benefit is typically granted for companies with an established track records in international trade.

Given these number of tax benefits, an effective tax rate may be a significant descriptor of the country's business environment. Organization for economic development and co-operation has calculated effective tax rates for different countries as of the year 2017. However, since statistics on the chargeable corporate income is available for the period 2004-2017 by the Government of Singapore, within this study the effective CIT rate (ECIT) was calculated for the above-mentioned period using data on tax revenue from the OECD. Both sources used current Singapore dollars, so no conversion was required. The results are consistent with the OECD calculations (16.2% effective rate for 2017) and are presented in the table below.

Table 1

Singapore ECIT rate

Year Rate	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
CIT	22%	20%	20%	20%	18%	18%	17%	17%	17%	17%	17%	17%	17%	17%
ECIT	22.64%	21.59%	20.30%	19.39%	18.32%	13.96%	15.28%	14.6%	13.76%	13.54%	13.63%	13.12%	12.63%	16.4%

Singapore has been actively attracting the largest banks and setting limits for the medium and small ones. It has formed as a versatile financial centre - the market of gold (the most advanced physical gold storage built in 2010, - Singapore FreePort, is located in Singapore), currencies, bank loans and securities. Singapore's foreign exchange market is divided into internal accounts for residents under government control, and external - for non-residents - under limited control. Based on external accounts, the Asian Eurodollar market has developed as a branch of the London Eurodollar market. Sustainable development of the Singapore's economy for more than 50 years (evaluated later in the study), a budget surplus and well-developed monetary policy is the foundation that provides stability for the Singapore dollar and reliability to Singapore banks. For a world, where the possibility of bankruptcies of banks and defaults of entire states is rather substantial, such stability is much appreciated. And, although to open accounts in Singapore banks personal presence is required, as well as a fairly strict application review process, the advantages of opening bank accounts in Singapore banks outweigh the technical inconvenience that occurs in the beginning.

Singapore Exchange Limited (SGX) was established on December 1^st, 1999 as a result of the merger of Stock Exchange of Singapore (SES) and Singapore International Monetary Exchange (SIMEX), the derivatives exchange. Before the creation of the International Financial Centre, Singapore has already been a major centre of production and trade, including re-export. At the state level, a policy of stimulating investors was carried out for the development of the financial and manufacturing sectors of Singapore.

The Singapore Financial Centre has employed its competitive advantages as an Asian regional base for multinational corporations and foreign investors. At the same time, it managed to offer the market new unique products that no one had offered at that time. So, Singapore was the first market to trade futures on the Japanese Nikkei 22543 index, while in Japan itself such futures were yet to be offered. As a result, Singapore has become the most international of the Asian financial centres: by 2004, almost half of the new issues on Singapore Exchange Limited (SGX) and 25% of all companies included in SGX listing were foreign. As of now, Singapore is considered the largest listing site for foreign debt securities in the region [SGX, 2020].

Another important factor in becoming Singapore as an international financial centre has become stability and fairness of the judicial and regulatory system. Legal and Singapore regulatory institutions ranked as most effective among Asian financial centres, even compared to Hong Kong. In addition, it is believed that the level of corruption in Singapore is lower than in Hong Kong. According to the 2019 Corruption Perceptions Index (CPI), Singapore was rated positively and ranks 4^th in the world (after Denmark, New Zealand and Finland) in terms of transparency of officials and politicians [Transparency International, 2019].

Very rapid development of the financial sector services significantly changed the sectoral structure of GDP. If in 1960 they accounted for 14%, in 1980 - 18%, then in 1990 - 26%. From the beginning of the 1990s and to this day, this area remains not only as important, but also a leading industry. In addition to electronics, of the latest industries such as biotechnology, logistics, IT, as well as the chemical and pharmaceutical industries, the expansion of foreign capital inflows, and the development of scientific research that were considered as the basis of economic growth and development of the country. The growth rate of GDP at market prices in 2005 after lowering during the first five-year period of the 21^st century down to 4.8% increased again in 2005-2010 up to 6.4% due to an increase in investments in fixed assets, which over the decades have grown 1.5 times. In the structure of GDP, the leading place was taken by the sphere of financial and business services (28.7% in 2019), followed by the manufacturing industry (20.9%) [Singstat, 2019].



2.4 Hong Kong

According to the Triennial Survey of Foreign Exchange and Derivatives Market Turnover [HKMA, 2019], Hong Kong has been ranked 4^th in the world in terms of foreign exchange transactions, 3^rd - in over-the-counter interest rate derivatives turnover, and is one of the four of the largest gold markets, the most liberalized of the major insurance markets. In Asia, it is the second largest stock capitalization market (surpassed Japan in 2019, according to the data compiled by Bloomberg), one of the largest regional money and debt markets and derivatives markets, the centre of asset management.

Hong Kong has a large number of leading international investment banks, brokerage and audit firms, law firms, and asset management companies. Although the development of Hong Kong is largely based on its functions as a centre of international trade and the nature of its relationship with China (the principle of "one country - two systems"), an equally important role in this was played by the institutional and regulatory architecture for supporting business, financial transactions, the clearing and payment systems, and the administrating system [Russolillo, 2019].

The main features of the Hong Kong financial market are the following:

advanced legislation, judiciary system based on English common law system and IFRS;

modernization of legal regulation and expansion of the scope of exchange operations;

low tax base (including the absence of capital gains tax or inheritance tax);

a policy of attracting highly qualified specialists in the financial sector;

effective market infrastructure, based on advanced technologies, introduction of new automatic e-commerce systems.

As the result of the long evolution of regulatory functions in Hong Kong there is a system under which there are four financial regulatory authorities - the Hong Kong Monetary Authority (HKMA), the Securities and Futures Commission of Hong Kong (SFC), the Insurance Authority (substituted the Office of the Commissioner of Insurance) and the Mandatory Provident Fund Schemes Authority (MPFA). Despite certain disagreements in some cases, regulators closely interact with each other, based on common goals and objectives for the further development of the regulatory system, in large based on the recommendations of the “Group of 20” and the Bank for International Settlements.

Monetary and other regulatory authorities of Hong Kong consider increase in the effectiveness of the mechanism of financial legislation and strengthening of the prudential control of major financial institutions in combination with further development of market incentives, sorting measures to protect investors, including a system of improving financial literacy, the development of international cooperation in the corresponding field of activity as the main directions for development of the industry [Strategic Direction, 2018].

After the global financial crisis, the Securities & Futures Commission of Hong Kong significantly tightened measures regarding the use of insider information, introduced and put into practice the principle of criminal persecution. In order to ensure the interests of investors, investigations were conducted onto the trading practices of the so-called “Mini-bonds”, as the result of which a decision was made to compensate most of the losses to investors (about 70% or more, depending on their age), to ensure the return by financial institutions of the income received when using these securities as collateral and mortgages, as well as when structuring derivatives. For the first time in the history of the authority, it used the right to intervene in the results of privatization and corporatization of companies on the basis of evidence of votes manipulation at the general meeting of shareholders. Since the beginning of 2009, new rules have been introduced regarding information disclosure. Within the process of their development, the American legislation on the financial performance of companies requiring the most efficient submission of reporting data to the regulatory body and their publication was used as the basis.

In addition to the stock exchange, Hong Kong also has an active over-the-counter market (OTC), which mainly trades in swaps, forwards and stock options, interest rates and currency. To provide clearing services in this area, since November 2013, OTC Clearing Hong Kong Limited (OTC Clear) has been launched, which is a subsidiary of the main exchange structure. Following the 2014 Securities and Futures (Amendment) Ordinance, the HKMA and the Securities and Futures Commission (SFC) developed detailed rules for implementing an over-the-counter derivatives market regulatory regime in Hong Kong, aimed at reducing systemic risk and increasing transparency in the OTC derivatives market. Contacts with foreign regulators are supported through bilateral and multilateral channels to discuss cross-border issues arising from the reform of derivatives markets.

As one of the largest asset management centres in Asia, Hong Kong is attracting international investors who use it as a platform for investing in the region. As of the end of 2017 total assets managed by operating companies amounted to $21.1 billion [HK Census and Statistics Department, 2019]. Hong Kong is also a regional centre portfolio management, including authorized Hong Kong mutual funds and mutual funds. As of December 31, 2017 - the value added per person of these funds amounted to about 2.2 million US dollars (for comparison, $1.9 million in the entire financial services sector). In order to simplify the processing of operations with investment funds, a system of services for routing orders and settlements for transactions with such funds was introduced (CMU Fund Order Routing and Settlement Service). This system was strengthened in 2013 by supporting cash settlements for transactions with collective investment instruments using the real-time gross-settlement System (RTGS).

The Chinese government consistently includes Hong Kong in its national five-year plans, considering it as an important factor providing China with further integration into the global economy. Hong Kong Special Administrative Region is considered for development as a global financial centre, as well as shipping and trade centre. The list of implemented long-term measures includes promoting listing of foreign blue chips, expanding offshore operations in RMB, developing the commodity futures market, removing restrictions on the participation of insurance companies in investment offshore operations in China, as well as the development of the reinsurance market. In particular, the State Council of the People's Republic of China (PRC) allowed the mainland financial institutions to issue bonds in RMB in Hong Kong.

One of the main activities of the SFC during this period was also the development of international cooperation in the field of regulation and supervision. In addition to the previously available documents, at the end of 2008, between the Commission and the relevant PRC body, an agreement was signed on cooperation and exchange of information on the use of funds of Chinese insurance companies abroad, on mutual permission for securities trading (Stock Connect), as well as a memorandum on basic liberalization of trade in services, ultimately aimed at providing a national regime for banks.

According to the experts, as a result of measures taken in Hong Kong in recent years, an improvement in the transparency of the financial market should be expected, further regulatory practice will be brought into even greater conformity with the standards of global international centres, which will allow Hong Kong's rating to improve regarding this indicator.

Tax regime

Income tax is one of the main taxes in Hong Kong and applies to any legal entities engaged in any commercial activity in the jurisdiction [PWC, 2020]. Taxable income is the gain on business that remains after deducting all expenses. At the same time, profits from the sale of assets are not taxed.

Some of the tax deductions are insurance contributions and payments to the pension fund; costs of registering a trademark in Hong Kong or a patent; market research and marketing expenses; continuing education expenses; advertising costs; salaries of employees; office rental costs; expenses for the repair of equipment or premises directly related to the conduct of commercial activities; depreciation deductions. However, rental costs of premises that are in no way related to business, gift or loss of assets, and any personal expenses that have nothing to do with business cannot be deducted from the tax base.

The corporate tax rate in Hong Kong is currently 8.25% for the first 2 million Hong Kong dollars and 16.5% for the rest of the profit. Private enterprises and partnerships are subject to tax rates of 7.5% and 15%, respectively. There are separate rules that determine the tax liability for industries like air service, shipping, and financial services, as well as for Islamic bonds.

At the same time, along with the introduction of a two-tier business taxation system in Hong Kong in 2017, special measures were introduced to avoid abuse of tax benefits by large businesses: each group of companies can specify only one of all of its legal entities, for which the rate of 8.25% will be applied for the first 2 million.

Income tax is accrued after the end of a fiscal year, which can begin on April 1 and end on March 31 or from January 1 to December 31, which is the entity's choice. In addition to the income tax received in the reporting year, a “Provisional Tax” will be added that is the estimated income tax that the Hong Kong company is supposed to receive in the next financial year (the tax itself calculates its amount). Thus, in the next reporting year, a recalculation will be made depending on the real income of the company: if the company receives less income than calculated in the tax, the recalculation and tax balance for this year will go in the firms favour, and if more, the tax balance will be charged in the next year.

In recent years, the Hong Kong budget has been closed with a large surplus, so the authorities every year offer businesses tax deductions, which in some cases make up to 75% of the amount of the accrued income tax.

Capital gains in Hong Kong are not taxed. However, with the profit that is received from the disposal of assets, you may still have to pay income tax if the transfer was a commercial transaction.



3. Tax Policy Significance and its Implications for Russia

3.1 Analysis of a Relationship between a Tax Regime and FDI

In order to identify the impact of the introduction of tax breaks, a regression analysis was run in case of each of the previously studied countries. Starting with Singapore, analysis was conducted on the 1997-2019 data of its economy performance which covers the period of significant reductions. As the predictor variable, data on the volume of foreign direct investment in Singapore within this timeframe was provided by the Trading Economics service in S$ millions which was further converted to the US dollars with the average exchange rate by year and then deflated to the US$ of 2010 to maintain cohesiveness among data. Within the FDI data, outliers of 1998 and 2002 were identified using the interquartile range method, however, all the numbers were consistent using the standard deviation method, so all the data was used in the analysis.

As an alternative variable, FDI volume was converted to its fraction of the overall stock capital (statistics by the Federal reserve Bank of St Louis) which was also deflated from US 2011 prices to 2010.

As the explanatory variables, the following data was obtained: corporate income tax rate, deposit interest rate (as of December of the corresponding year), domestic credit granted by the banking sector to private companies (as a liquidity constraints proxy), and net external debt (Singapore was considered a debt-free country before 2004). In order to avoid a possible simultaneity issue of credit and debt causing changes in FDI and vice versa, both variables were used as lagged statistics. Some studies show lagged effect of changes in interest rates on aggregate spending, therefore interest rates in (t-1) period were used in the calculations. All of the data is included in the appendix of this paper (Appendix 1), while the results are presented below.



Table 2

Singapore, regression analysis

Dependent variable	FDI, nominal value	FDI as % of capital stock
Constant	43,239	0,045
Tax rate	-4,2074*	-0,002
Interest rate in t-1	3,3902	0,0002
Private credit in t-1	0,7244**	0,0002
Net foreign debt in t-1	0,0097	0,01
Observations	22	21
Adjusted R2	0,661	0,273
Significance F	0,0001	0,038

Note: t-statistic in parenthesis. ** P-value < 0.01. * P-value < 0.05

Despite both tests producing significance F below 0.05, FDI as percentage of the capital stock has not shown any significant correlations with the variables. However, in terms of its nominal value, FDI is significantly affected by the credit granted by the banking system to the private sector (1% increase causes a $0.7-billion increase in FDI). Statistically significant correlation is also observed between FDI and CIT: 1% increase would cause $4.2-billion decrease that is about 20% of the CIT revenue of $19.8 billion in 2017 or 1.4% of the GDP of $301 billion. The properties of the residuals were verified with the Breusch-Godfrey test (as lagged data was used), p-value of which of 0.011 allowed to reject the null hypothesis of autocorrelation. The absence of the residual auto-correlation also justifies the use of the lagged data [Wilkins, 2018].

Similarly, as in the case of Singapore, to identify or reject any effects of tax policy changes of the foreign direct investment of Hong Kong a regression analysis was conducted on the data of 1997-2018 country's economic performance that covers the period of its CIT rate volatility of around 1.5 percent points.

As the predictor variable, data on the volume of foreign direct investment in Hong Kong within the above-mentioned timeframe was provided by the Trading Economics service in HKD billions which were further converted to the US dollars with the exchange rate as of 31^st of December of the corresponding year and then deflated to the US$ of 2010 to maintain cohesive data. Within the FDI data, outliers of 1997-1999 and 2002-2004 were identified using the interquartile range method, however, all the numbers were consistent using the standard deviation method, so all the data was used in the analysis.

As an alternative variable, FDI volume was converted to its fraction of the overall stock capital (statistics by the Federal reserve Bank of St Louis) which was also deflated from US 2011 prices to 2010.

Again, as the explanatory variables, the following data was obtained: corporate income tax rate, deposit interest rate (as of December of the corresponding year), domestic credit granted by the banking sector to private companies (as a liquidity constraints proxy), and net external debt. Similarly, issue of credit, interest rate, and debt were used as lagged statistics. All of the data is included in the appendix of this paper (Appendix 2), while the results are presented below.

Table 3

Hong Kong, regression analysis

Dependent variable	FDI, nominal value	FDI as % of capital stock
Constant	-89,1619	-0,0363
Tax rate	0,9975	-0,0026
Interest rate in t-1	-4,9904	-6,4105
Private credit in t-1	0,6521*	0,0003
Net foreign debt in t-1	1,0157	0,0026
Observations	22	21
Adjusted R2	0,4816	0,4978
Significance F	0,0037	0,0039

Note: t-statistic in parenthesis. ** P-value < 0.01. * P-value < 0.05

As in the previous case, despite both tests producing significance F below 0.05 that confirms viability of the models, FDI as percentage of the capital stock has not shown any significant correlations with the variables. However, in terms of its nominal value, FDI is significantly affected by the credit granted by the banking system to the private sector (1% increase causes a $0.65-billion increase in FDI). Statistically significant correlation is not observed between FDI and CIT, which can be explained by its historically low rate (16.5% in 1997 and effective - 15.2% in 2017) that has only slightly been altered throughout the period, and it's still considered one of its strongest competitive points [The Economist, 2014]. The properties of the residuals were verified with the Breusch-Godfrey test (as lagged data was used), in which case p-value of 0.034 allowed to reject the null hypothesis of autocorrelation.

In case of the United Kingdom (nominal rate and effective rates are equal, 19%, which is lower than the average global rate of 21.4%) and Luxembourg (nominal rate of 27.08% and effective 24.5% [OECD, 2017]), regression analysis on the correlation between CIT rates and FDI has not produced any statistically significant results, data is available in the appendix of the paper (Appendix 3 and Appendix 4), therefore importance of tax policy for economic development cannot be identified, which means the first question of the research on the tax policy effectiveness in regard to attracting FDI can be answered positively only partially. The analysis is continued later in the paper.

Nevertheless, as it can be seen, decades of promoting country-led structural reforms (legal, banking, tax policies), which were aimed at liberalizing the country's economy, its further modernization and the creation of the most favourable investment regulatory, banking and tax climate led to a substantial inflow of foreign direct investment in both countries: from $21 billion in 1997 to $84 billion in 2017 in Singapore and from $10 to $103 billion in Hong Kong within the same time period. The key innovations, actively used in the most developed countries, include the following tools: special mode taxation of income generated by intellectual property (i.e., Patent Box in the UK); tax credit for R&D expenses; annual investment allowance (AIA) or, as it is often called, by the Russian tax specialists, investment relief on an income tax. Special attention should be given to the assessment of possibilities for using measures to stimulate investments in start-ups and profitable firms through investment schemes (EIS), as well as schemes of state co-financing of recruitment and investment in human capital.

Although, Russia is yet to establish an IFC in Moscow or any other region, with usage of the same regression analysis method, the effect of a corporate tax regime can be estimated. The data from 2001 to 2018 was available by the World Bank, as well as Trading Economics and the Federal reserve Bank of St Louis, which was further deflated to the 2010 US dollars. Within the FDI data, outliers of 2001-2005, 2014-2015, and 2017-2018 were identified using the interquartile range method, however, all the numbers were consistent using the standard deviation method, so all the data was used in the analysis. The predictor and explanatory variables were used similarly to the previous cases. All the data is available in the appendix (appendix 10), while the results are provided below.

Table 4

Russia, regression analysis

Dependent variable	FDI, nominal value	FDI as % of capital stock
Constant	56,8887	0,0049
Tax rate	-120,0981	-0,0108
Interest rate in t-1	4,3221	0,0003
Private credit in t-1	1,1624*	0,0001
Net foreign debt in t-1	2,13**	-0,0002**
Observations	18	17
Adjusted R2	0,5834	0,5701
Significance F	0,0032	0,0057

Note: t-statistic in parenthesis. ** P-value < 0.01. * P-value < 0.05

Despite both tests producing significance F below 0.05, FDI as percentage of the capital stock has not shown any significant correlations with the variables. However, in terms of its nominal value, FDI is significantly affected by the credit granted by the banking system to the private sector (1% increase causes a $1,16-billion increase in FDI), while an increase in foreign debt results in a 2,13-billion increase in FDI. However, no significant correlation can be observed between CIT rate and FDI, which can partially be explained by the regional differences among the CIT rates. The properties of the residuals were verified with the Breusch-Godfrey test (as lagged data was used), p-value of which of 0.048 allowed to reject the null hypothesis of autocorrelation.

Regardless of the significance of the correlation between CIT rates and FDI, the model is proven to be viable and explains 58% of the change in FDI. However, Russia is considered a country with a relatively low CIT rate of up to 20% (i.e. full 20% are paid on corporate income in Moscow) and an average effective rate of 15.2% [OECD, 2017]. Incorrect awareness of goals, as well as an abundance of measures aimed at attraction of foreign investors may lead to the fact that the IFC in Moscow will operate in the format of an “internal offshore” [Alekseev, 2012]. Financial capital in such framework will not enter the national economy and therefore, of course, will not contribute to the development of infrastructure and modernization of production capacities. In other words, altering tax policy in Russia may still have potential and even become an effective tool; however, it should be treated with caution. This notion gives base for the third research question of the study on the additional measures being required to further develop the financial industry in Russia, which are discussed later in the paper.

3.2 Macroeconomic Stability Analysis

As limitations on the tax policy effectiveness have been identified, it is important to outline other areas of development necessary for the successful operation of an IFC, whether it is in Moscow or in another location, in Russia. According to the Global Financial Centres Index, apart from a favourable tax regime, one of the reasons for the success of international financial centres is the macroeconomic stability of their host countries.

To quantify this factor and assess Russian standing in regard to it, various parameters can be used to measure the macroeconomic volatility, most of which fall into the Cobb-Douglas equation [Vasylieva, 2018]. For a cross-country comparison within the time period of 1990-2018 the following variables were used: GDP - logarithm of GDP per capita; K - logarithm of capital costs (gross fixed capital formation); L - logarithm of labour input (labour force aged 15 and above); MS - macroeconomic stability (computed as a logarithm of the sum of unemployment and inflation rates); FDI - logarithm of FDI as % of GDP. All the data was extracted from the World Bank database, except for the FDI that was available by the Global Economy. In order to avoid the issue of dynamic properties in case of the panel data series, the above-mentioned indicators were expressed via natural logarithms. Statistical analysis of the corresponding mean, standard deviation, and coefficient of variation of the values is presented in the table below.

Table 5

Macroeconomic stability indicators

Country	Statistics	GDP	K	L	MS	FDI
United Kingdom	Mean	10,3977	26,5818	17,2378	2,1464	1,1374
	Std. Dev.	0,3164	0,3008	0,0625	0,2883	0,7541
	CV	0,0304	0,0113	0,0036	0,1343	0,663
Luxembourg	Mean	11,1645	22,6230	12,2539	1,7687	2,7101
	Std. Dev.	0,4177	0,4669	0,1958	0,246	1,3821
	CV	0,0374	0,0206	0,016	0,1391	0,51
Singapore	Mean	10,352	24,3952	14,6902	1,7045	2,7207
	Std. Dev.	0,4743	0,5763	0,2654	0,2717	0,4753
	CV	0,0458	0,0236	0,0181	0,1594	0,1747
Hong Kong	Mean	10,2435	24,5519	15,0611	1,8611	2,6926
	Std. Dev.	0,3056	0,3287	0,0997	0,4931	0,9696
	CV	0,0298	0,0134	0,0066	0,2649	0,3601
Russia	Mean	8,5291	25,7337	18,1192	3,2118	0,2596
	Std. Dev.	0,7563	0,8225	0,0264	1,1553	0,8833
	CV	0,0887	0,032	0,0015	0,3597	3,4028

As expected, Russia has the highest coefficient of correlation in terms of GDP per capita (0.0887 in contrast to 0.0298 in Hong Kong) due to the high uncertainty rate for the economic growth, as well as the highest ratio of dispersion to the mean for the FDI (3.4028 compared to 0.1747 in Singapore). Capital costs and labour input have the lowest variabilities among all factors - 0.0113 (the UK) and 0.0015 (Russia), respectively.

Even though Russia has low indicators in case of the labour variability, overall, it can be considered as a less stable economy than the top-rated countries. Therefore, it is important for Russia to adapt similar preconditions for improving the investment climate, mainly by improving macroeconomic parameters: inflation, deficit the state budget, the dynamics of the exchange rate. In addition to the macroeconomic stability, creation of a risk monitoring system in the financial market as part of macroprudential supervision (including monitoring of the OTC segment, market derivatives, portfolio investments of non-residents, the formation of bubbles market capitalization) should be prioritized. To streamline state control of systemic risks, it seems reasonable to create a special body. Therefore, it seems reasonable to take into account the experience of the United Kingdom of a relatively new supervisory body - the Financial Conduct Authority (FCA), which was established in April 2013.

Another aspect that should be implemented in terms of macroeconomic stability is strengthening the position of the rubble in the CIS countries, its transformation into a regional reserve currency, as well as the currency of international settlements and credit operations; extension of bank lending operations in rubbles to European and Asian countries, the formation of an interbank lending market in the Russian currency; the introduction of the rubble in foreign trade calculations with major partner countries [Evlahova, 2019].

3.3 Cross-country Analysis Inference

In addition to the above-mentioned recommendations, the cross-country study of practices outlined a few other important factors. The case of Hong Kong is highly illustrative for Russia as for both states infrastructure remains one of theirweak points, similar to the Asia region as a whole, except for Singapore that is ranked among top 10 in the world [The Economist, 2014]. The main goal of developing the country's industrial and innovative infrastructure is to create optimal conditions for attracting high-tech business [Nikolaevna, et al., 2018]. Types of infrastructure, such as techno parks, special economic zones, and industrial parks, will contribute not only to this goal, but also to attract foreign investment in the country's economy; increase the level of employment and skills of the workforce; ensure effective use of the territory of the region; improve living standards and purchasing power of the population; increase competition in the national economy and reduce its monopolization.

The Luxembourg case has also raised important concerns as it shows the importance of transparency in the system, in addition to the well-developed infrastructure [Deloitte, 2019]. There is a high potential for systemic risks in Russia, which is associated with the predominantly speculative nature of operations in the financial market, and opacity of its significant segment (over-the-counter turnover and operations with derivatives), as well as a large amount of the accumulated portfolio investments of non-residents ($382.3 billion at the end of the 3^rd quarter of 2019 [CBR, 2019]). In terms of attracting investment, reputation plays an important role, therefore forming a publicly available disclosure system on the stock market (issuers and professional participants) that is owned by the state and free for users and strengthening the institution of independent financial advisors, including legislative consolidation of the licensing requirements for this type of activity, should be at the top of the list for public administrators.

In regard to this, the National Settlement Depository (NSD) has been established and is now the largest depository that is part of the Moscow Interbank Currency Exchange Group (ex-MICEX), the Russian stock exchange, which in December 2011 merged with the competing Russian Trading System (RTS) and created the Moscow Exchange Group. After that, during 2012, NSD integrated into its business processes the services of DCC CJSC, a settlement depository in the markets of the ex-RTS Group.

Other features of the Russian economy that deteriorate its investment attractiveness in comparison to other countries include the following:

Not sufficiently powerful and diversified real sector of the Russian economy with a predominant export-raw model of its development;

A relatively less capacious and liquid financial market, a narrow circle of investors. The ratio of stock market capitalization to GDP in 2017 was only 39.49% (for comparison: Hong Kong - 1098.94%, Singapore - 232.64%, the UK - 116.88%, Luxembourg - 105.41% [Trading Economics, 2017]); as well as in terms of domestic credit (in 2018, 53.96% of GDP [World Bank, 2018]);

Institutional underdevelopment of the financial sector, manifested in the weakness of institutions such as pension funds, mutual funds, independent financial advisors;

Lack of guarantees for the safety of the population's investment in the stock market through funds and management companies.

The following issue may be irrelevant within the studied countries, nonetheless, given the geographical size of the country, it seems reasonable to establish a system of financial centres, instead of only one in the capital, as it will prevent the possible intensification of regional imbalances in the financial and economic development in connection with the development of the Moscow IFC alone (in other words, an excessive concentration of financial institutions and resources in the Moscow region with a paucity of them in other regions of the country).



Conclusion

The goal of studying international practices of successful IFCs operations was set in order to identify the main contributing factors, with a special emphasis on the tax regimes as one of the main areas of the public policy and analyse their application to the Russian environment. The quality of the financial industry and the opportunities provided by the global market have very specific significance for the development of the economy and welfare of its citizens. And there are obvious prerequisites for the development of Moscow as an international financial centre. One of them is the fact that Russia itself is large economy that, from a global viewpoint, creates capital demand and acts as its source.

Among the research questions, established at the beginning of the paper, the one on the effectiveness of the low tax rates ended in an inconclusive way in cases of the UK and Luxembourg, which suggests a different explanatory model for a further research. However, features of a successful IFC and necessary alterations in the Russian environment, were both discussed within the study.

As a result, the following recommendation were proposed in regard to developing the financial industry in Russia that support the second hypothesis on the importance of macroeconomic stability and infrastructure for an IFC:

Altering the tax system to the needs and features of the FDI as well as Russian domestic investors, considering the risk of operating as an “internal offshore”;

Modernization and diversification of the real sector of the economy, revival and the development of the industrial sector on an innovative basis with the simultaneous development of the infrastructure;

Creation of preconditions for enhancing the investment climate, mainly by improving macroeconomic parameters;

Creation of compensation funds for collective investors and managing stock market companies;

Increase in the volume of funds placed on the capital market by the population, collective investment institutions and pension funds by involving these entities in the market activity.

Summarizing the above, it should be noted that the formation of the IFC in Russia should accompanied by economic policies aimed at preventing crises and the creation of conditions for a sustainable economic development while maintaining the priority of market principles. The accelerated development of the IFC in Moscow, naturally, will not be successful, since it will lead to predominantly speculative operations and an inflation of a bubble in the financial market. The basis for establishing an IFC should be a modernized and diversified real sector of the economy. Only the gradual formation and development of a system of financial centres can provide sustained economic growth and macroeconomic stability in the country.



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