President Putin's tax reform plans have hit a roadblock in the Federation Council, Russia's upper house of parliament. At present the Federation Council consists simply of the Governors of Russia's 79 regions, and the spat is an illustration of why the President is separately trying to reform the Council by including centrally-nominated members.
The problem is the 4% turnover tax, due for abolition, which is collected by the regions and spent by them, unlike the VAT, which at 20% is divided between Central and regional government. The regions fear that if they surrender the 4% turnover tax, they will not be recompensed in other ways, as is being promised.
Until now, the tax reform proposals have been doing well, with the replacement of the existing progressive income tax by a flat rate 13% tax already through the Duma (lower house). The Federation Council is likely to pass the income tax proposal, and other parts of the tax package, but wants to retain at least a 2% turnover tax.
First Deputy Prime Minister Sergei Shatalov said he would try to convince the Council to change its mind: 'Of course, we will be working with the Federation Council and will try to explain our ideology and why we are doing what we are doing.'
The tax system in Russia is not like a western tax system, which, whether high or low, is accepted as inevitable by people and businesses alike. They may try to avoid it by craft, or the use of offshore schemes, but relatively few simply ignore it, as is the case in Russia.
This attitude is deeply rooted in the Soviet and even the Tsarist past of Russia: the autocratic authorities compensated for cheating and evasion simply by adding more taxes. Western companies in Russia that have tried to be 'model citizens' have found that if they pay all requisite taxes, they will have no turnover left!
Typically, a Russian company pays its workers a small salary in official roubles, dutifully deducting 40% income tax, or whatever, and handing it over to the Government. But then they pay the worker three times as much in dollars, or in goods (that's where the 300,000 missing Ladas went, of course). The annual corporate tax return, a bulky document with hundreds of lines of minutely detailed categories of expenditure and sales, including bizarre items like the addition of advertising expenditure to taxable revenue (if you can afford to advertise, you must be able to pay more tax), is merely the starting point of a lengthy and mutually rewarding negotiation with the tax inspector.
The Financial Controller (usually a woman) on her way to the tax inspector to deliver the annual report is a sight to see, laden like a Christmas tree with parcels, bottles and boxes of chocolate!
Well, it is all to be swept away, says the President. Good luck to him, he will need it, and a strong stick as well.
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