Putin Calls For Tax Code Stability After Latest Round Of Reforms

by Tatiana Smolenskaya, Tax-News.com, Moscow

26 April 2006

A comprehensive package of tax reforms that will soon be submitted to the Russian parliament is likely to be the last round of major changes to the nation's tax law for the foreseeable future, as President Vladimir Putin has called for a period of stability in the tax system.

Deputy Prime Minister Alexander Zhukov told a cabinet meeting on Monday that the latest set of proposed amendments will improve tax administration, increase social security payments, introduce a new system of value added tax refunds and encourage production in the Siberian oil fields.

Zhukov also told the government that after the amendments are written into law, the tax code will remain unchanged "for quite a long time".

Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax. The government is mulling a further reduction in VAT by 5% to 13%.

Efforts are also being made to improve administration of the tax system and curtail the power of tax inspectors to conduct repeat audits on the same firms; and new legislation seeks to streamline tax audit procedures and introduce electronic accounting.

Other tax law changes under consideration by the Kremlin include a change in the minimum capital requirement for businesses - a move designed to crack down on the use of abusive tax shelters.

However, Putin, while notionally supportive of tax cuts and simplification of tax legislation, has repeated his warning that tax reform must be balanced against the needs of business, which requires certainty in the tax code. According to Putin, the Russian tax burden, at 34% to 35% of GDP, is already lower than in most of Western Europe, where the average is about 40%.

Although he expressed "full agreement" with Zhukov's latest proposals to improve the tax system, Putin told the cabinet that: "We must seek to achieve some kind of stability in that sphere."

“The state’s interests are to seek a compromise between tax authorities and industrial development but some sort of stability should appear there someday,” stated the President.

Under the new proposals, the government plans to increase social security deductions from personal income tax to 50,000 rubles ($1,826) from the current 38,000 rubles. It also wants to introduce deductions for health insurance.

In addition, from 2007 the government plans to switch to a new system of VAT refunds whereby companies can claim rebates before the government verifies their validity.

Other measures include a zero tax rate for mineral production in East Siberia.

Zhukov also revealed that a law has been drafted to index excise rates by an average of 8.5% for all eligible goods.

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