Russia To Continue Cutting Taxes

by Tatiana Smolenskaya, Tax-News.com, Moscow

01 February 2006

The Russian government has announced its intention to continue lowering the nation's tax burden over the coming years, although President Vladimir Putin has cautioned that tax cuts should only be attempted if inflation is kept in check.

One of the main tax measures to be worked on by the Kremlin is a cut in the 18% value-added tax rate to 13% by 2009, under a three-year development program approved by Prime Minister Mikhail Fradkov.

However, Putin has expressed reservations over the proposals because he fears that the VAT cut will only serve to boost company profits rather than bring about the desired fall in consumer prices.

The President has set a reduction in the Russian inflation rate to single figures as "a main priority" for the government's economic policy. Inflation ran at 10.9% in 2005.

Putin, while notionally supportive of tax cuts and simplification of tax legislation, has previously warned that tax reform must be balanced against needs of business, which requires certainty in the tax code.

Nonetheless, in November, he reiterated his commitment to reducing taxation as a share of the economy "yet further", and assured the business community that tax changes will be carried out in a "completely transparent" fashion.

According to Putin, the Russian tax burden, at 34% to 35% of GDP, is lower than in most of Western Europe, where the average is about 40%. Government plans call for a further one percentage fall in taxation as a share of GDP.

Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax, which was recently cut to 18% from 20%.

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