Putin Signs Russian Tax Overhaul Into Law

Tatiana Smolenska, Tax-news.com, Moscow

08 August 2000

Yesterday, Russia's tax laws underwent a major overhaul as President Vladimir Putin put his signature to a new tax code, completely revamping Russia's tax collection system and forming the centrepiece of his market reform strategy. Putin told a meeting of Russian cabinet officials that the act was 'the most important event in the country's life.'

The new tax code introduces a flat income tax rate of 13 per cent and other measures designed to boost the lagging Russian economy. Other aspects of the reforms include consolidating several payroll taxes into a single, lower social security tax and eliminating loopholes such as income tax exemptions for soldiers and judges.

The new flat income tax rate is judged to be the most revolutionary change. It will take effect next year and replaces an existing progressive tax rate ranging from 12 per cent to 30 per cent. Whilst the more wealthy echelons of Russian society will of course benefit, the new rate will mean a increase for poorer Russians who currently pay the minimum 12 per cent.

The main thrust behind the new tax package is a desire to stamp out tax evasion, for so long a major problem in Russia, with most businesses and indeed citizens avoiding tax or underreporting their incomes. The new tax laws come just days after one of Russia's best known vodka distilleries, the Kristall distillery in eastern Moscow, home of the Stolichnaya brand, was raided by the so-called Russian "tax police", who took documents relating to an audit early this year which turned up financial irregularities, including underreporting of profits. No doubt the proprietors of the distillery would argue, like most Russian businesses, that the combined burden of income tax, profits tax and social security taxes would mean ruin for them if they paid in full.

Putin's somewhat simplistic view of the new tax measures seems, perhaps, too idealistic. The government, which consistently fails to collect its full quota of taxes, says the lower rate will cut evasion and boost government revenues by encouraging people to report their true incomes. It is also thought that a unified, single rate will make it easier to calculate and collect taxes. On a political level, the new tax code is seen as a major element of Putin's grand plan to increase central authoritiy by curbing the control that regional administrations have maintained over tax revenues.

The government is also hoping the lower income tax rate will encourage Russians to bring home and invest some of the billions of dollars stashed in secret foreign bank accounts. Russian officials estimate the tax burden on companies should fall by 25 percent.

Analysts say it may be months or even years before the impact of the new tax code is felt. Critics of Putin and his market reform programme say that it will not even come to that. Some maintain that the flat rate is simply a ruse designed to persuade businesses to report their full incomes and that the old tax regime will be restored within a couple of years.

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