Conference To Examine New Russian Tax System

by Tatiana Smolenska, tax-News.com, Moscow

11 June 2002

Russia is basking in commodity prices that have returned it to the glory days of the mid-1990s, with money swilling through the economy and western businesses flocking to take advantage of the opportunities. Last time however western companies stopped short at actually investing in the productive structure of Russian business and industry, focusing instead on trading, because of the poor legal system and high taxes.

This time, perhaps it will be different: Russia has put in place a massive 3-part Civil Code and enormously enhanced the effectiveness of its legal system. And it has begun to create a more business-friendly tax environment, beginning with individual tax-payers, who now benefit from a 13% flat rate of income tax. The Russian government revealed recently that the flat tax rate imposed last year on individual taxpayers has been a resounding success, with personal income tax revenue up nearly 47% in 2001.

There is also a new Tax Code for businesses. Until recently Russian businesses were obliged to pay a social tax on salaries of up to 35.6%, a 5% sales tax, 20% VAT, a 5% advertising tax, a 2% property tax, and a 24% tax on net profits, to name but a few. This resulted in a situation whereby business owners operated dual book-keeping systems, paying their employees with cash, and recording lower figures in their books for the benefit of tax inspectors.

There appears to be hope on the horizon for the country's businesses, however. As well as the new Tax Code, President Putin has announced plans for a reform of business taxation which will give companies the option to pay a 20% profit tax or an 8% tax on revenues. Speaking in March, Putin promised that the effect on revenue collection would be 'no less revolutionary' than that of the flat rate personal income tax. And the Cabinet of Ministers is preparing a large-scale programme of support to entrepreneurs for the next three years, including investment, tax reductions and credits.

Presidential adviser Andrei Illarionov said: "This is a philosophy of creating a competitive economy and a competitive society, so that we do not leave ourselves any worse off than anybody in the developed countries."

First Deputy Finance Minister Sergey Shatalov says that the government has been systematically reducing the tax burden. "In the first year of reform the tax burden was lightened by 2 per cent of GDP, and in the second year by another 2 per cent of GDP. "For the consolidated budget this meant losses of about R200bn," Shatalov said, adding that the government regards this as investment in the future. With oil prices continuing to rise, this is an investment it can probably well afford.

Now the Adam Smith Institute, which has tracked Russia's progress over the last ten years with a series of high-profile conferences, is holding a major event on Taxation in Russia And The CIS. The opening session will focus on an overview of tax reform in Russia, with the motto provided by Prime Minister Kasyanov: "..tax revenues are the cornerstone for all other actions in the sphere of structural reforms." Subjects to be covered include:

• Assessment of tax reform in Russia, placing tax reform in the broader context of economic & financial reform in Russia;
• How does Russia's new tax regime compare with tax regimes in Western Europe?
• What are the implications of the new tax code for investment in Russia? What is the relevance for investment decisions? How should investment be structured in the light of recent changes?
• What further legislation is in the pipeline? In which way and how quickly does the government propose to amend imperfections in the tax code? How stable is the current legislation? Will WTO accession bring further reform and have an impact on import taxes? What is the government's policy on the internal allocation of taxes between federal, regional and local authorities?
• What is the government's policy on enforcing the legislation? How will it ensure implementation? What are the procedures that the tax authorities must observe when invoking certain provisions of the tax code? What rights do taxpayers have?
  

Participants in this session will include Vladimir Samoilenko, President, ITIC CIS & Tax Adviser for Russian State Duma and Sergei Shatalov, Deputy Minister, Ministry of Finance.

Further sessions will examine all aspects of Russian business taxation in depth. For a full programme, see http://www.asi-conferences.com/html/conference_html/finance/finance_jun02_prog1.html or contact Adam Smith Institute Conference Division on +44 (0) 207 490 3774.

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