Russia To Keep Flat Tax - For Now

by Tatiana Smolenskaya, Tax-News.com, Moscow

26 June 2006

Russian Finance Minister Alexei Kudrin has dismissed a suggestion by the country's audit chief that Russia would benefit from a return to a tiered system of income tax whereby higher incomes would be taxed at a higher rate - at least in the short term.

Sergei Stepashin, the head of Russia's Audit Chamber told a conference last week that such a progressive system of income tax was fairer, and would bring Russia into line with "global practice" where the more one earns, the more one pays in tax. Stepashin said this could be put in place by 2008/9.

Finance Minister Kudrin responded to the proposal by stating that a progressive tax scheme in Russia "would not work for long", and would be a retrograde step that inhibits economic growth.

"I am against a progressive scale for levying income tax," he was quoted as stating by the Russian news service, RIA Novosti.

Such a step would also run counter to the trend in Central and Eastern Europe, which has led the way in sweeping away complex tax systems in favour of simpler flat taxes to attract investment. Russia was one of the early flat tax pioneers, putting in place its 13% flat income tax in 2001, but many other countries in the region have since gone further than Russia by pegging both personal and corporate income taxes together at one level. In Russia, corporate tax is set at 24%.

Nonetheless, Kudrin did not seem to rule out a switch to progressive income taxation in the long term, saying that the current system was satisfactory "for the time being", and that the reintroduction of a tiered system was not on the agenda, according to the report: "for the foreseeable future".

Such a disruptive reform would also unlikely to be supported by President Vladimir Putin, who has argued repeatedly over the past several months that tax reform should be balanced against the needs of business, which seeks tax stability as well as tax cuts.

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