Russia Abandons Currency Exchange Tax

by Tatiana Smolenskaya, Tax-News.com, Moscow

10 January 2003

Last week, Russian President Vladimir Putin signed a law abolishing with effect from 1st January the 1% tax on the purchase of foreign currency. The Ministry of Finance said that in practice most retail currency exchange outlets collected the tax from their customers, but did not pay it onwards to the government. This allowed them to offer tiny spreads, unfairly competing with the bigger banks which were obliged to pay the tax on their foreign currency operations.

Receipts from the tax had been scanty, said the Ministry, and it was expensive to collect. Proceeds in 2002 had amounted to just 3 billlion rubles (US$100 million). It was impossible to block off all the ways in which the tax could be evaded, so it was better to abandon it, said a spokesman.

Larger banks responded favourably to the announcement, saying that they would now be able to offer effective competition to cowboy operators, who would have to quote much wider spreads.

Later in the week, addressing a conference for the heads of tax authorities and tax police units from across the Russian Federation, the President said that the 13% income tax rate had been a great success, resulting in an 80% increase in collections. However, he said that the black economy persisted, with many companies paying their employees in cash in order to avoid tax. Reiterating that the 13% rate was fixed for years to come, he said he thought that enterprises ought to respond in a 'reciprocal' fashion to the government's initiative by stopping illicit salary payments and joining the public economy.

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