Russian Taxes Are Falling - But Not Yet For Mittelstand

by Tatiana Smolenskaya, Tax-News.com, Moscow

16 January 2003

In the week in which an IMF team has arrived in Moscow to study today's Russian tax system, the government has proudly announced that as a result of its work in reducing and simplifying personal tax rates, income tax collections from individuals rose another 40% in 2002 after their initial jump of 47% in 2001.

In another demonstration of economic rationality, the tax authorities have made it clear that if Russian citizens invest material sums into new business activity, they will not enquire too deeply into the antecedents of the money, even if it has appeared from offshore, whither it might have 'flown' during the Naughty Nineties.

The good news continues for Russian taxpayers with a statement by Deputy Prime Minister and Minister of Finance Alexey Kudrin that the government is planning to reduce the VAT rate (currently 20%) at the same time as cutting back VAT exemptions that currently benefit some privileged economic sectors.

The Finance Ministry also says that it will present proposals for a reorganisation of the uniform social tax in February. This tax, which can amount to as much as 40% of gross pay, is the biggest remaining encouragement to firms to pay staff in 'brown envelopes' in order to cut down on their tax burden.

One not-so-positive development for small businesses is the revelation that the much-trumpeted switch to a simplified (and much reduced) basis of taxation is available only to those businesses that registered for it during a window of opportunity that was open just from October 1st to November 30th last year. In addition, the switch (to a unified tax rate of 6% on turnover or 15% on notional profit) was available only to companies with fewer than 100 employees and 9-month turnover of less than 11m roubles (US$300,000).

Quoting the age-old Russian lament of: "We wanted things to be better, but they turned out as always", one press commentator quipped that the rules would apply mostly to metro station cigarette kiosks.

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