Russia Duma Set To Approve Corporate Tax Reductions

by Tatiana Smolenska, Tax-News.com, Moscow

20 June 2001

This Friday sees the crucial second reading of a bill to restructure Russia's corporate tax system. In the Duma, a bill has three readings: the first tends to establish party lines on a piece of legislation; the second reading sees a series of votes on key amendments; and if the bill survives then the third reading is little more than a formality. Finally the bill goes to the Federation Council, which is more or less controlled by the administration, before being signed by the President.

Bills emerge from Committees, as in the US system, where they are knocked into shape before the first reading, and also in between readings, so control of individual committees as well as of the whole Duma is vital if the administration wants to follow through a coherent series of policy changes.

The Putin administration, unlike most of those that preceded it, does have control of the legislative process, at least for legislation that is centrist or right-leaning, and will probably get most of its way on the corporate tax bill, as it did on the reform of personal taxation last year, which introduced a standard rate of just 13% on most types of income.

The bill going for its second reading this week would slash the standard rate of corporate profits tax from 35% to 25% or even lower. Last week the Duma's budget committee recommended cutting the corporate profits tax rate to 23%. "The aim is to cut taxes so it is more profitable to pay them than to seek out schemes and privileges to avoid tax altogether," said Alexander Zhukov, chairman of the Duma budget committee, sounding quite Reaganite.

The Government is more cautious, and this week was sticking to its proposal for a 25% rate, saying a deeper cut would take too much of a risk with budget revenues. The government says every percentage point cut in the profits tax rate could cost the budget RR 25bn ($858m).

There is disagreement in Russia about the extent to which lower tax rates will encourage more taxpayers to allow their income, or a higher proportion of it, to enter the tax system. Whereas in the US corporate tax avoidance makes use of legal tax shelters, which are costly, in Russia tax avoidance uses cruder methods which effectively hide the income altogether. Evidence from the reduction of personal tax rates is so far inconclusive, but tending to suggest a disappointing result.

Apart from reducing rates, the new tax bill will modernise the antiquated and cumbersome system of corporate tax deductions. It will also give regional governments much less flexibility to fix local tax rates. Currently, the federal government takes 11% of the 35% corporate profits tax, giving the balance to the regions. Some of the 79 'subjects of the federation' have opted to take as little as 0.3%, creating what Alexei Kudrin, the finance minister, has called "offshore zones" within Russia.

The government wants a 25% tax split so that 8% goes to the federal budget and 17% to regional and local budgets, with regions allowed to cut rates by no more than 3%. The Federation Council, which contains a high proportion of regional governors, may jib at this aspect of the legislation.

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