Russia's New Tax Regime Tested As Disappointing Declarations Trickle In

by Tatiana Smolenska, Tax-news.com, Moscow

09 May 2001

The first test of Russia's new tax regime came last week, as the deadline for filing income tax declarations expired. Russia's sweeping tax reforms were instituted by President Vladimir Putin at the beginning of the year, the core of which was the 13 percent flat rate for personal taxation, aimed at persuading the Russian public to stop hiding its wealth. Serving as a little reminder were posters put up in Russia's major cities, warning people to cough up or face a visit from the tax police.

As it happens, fewer people filed income declarations this year than in the past two years. Some 3.1 million citizens handed in their income declarations for fiscal 2000 on time, 200,000 fewer than last year, according to Russia's tax ministry, which added that it was not unduly worried as it expected a further 300,000 to 400,000 returns in the coming days. The ministry said it would disclose the amount of income tax collected at the end of May.

Deputy Tax Minister, Salavat Aminev, said the drop in tax declarations was linked largely to an increase in year-end filers. Some 1.25 million people filed separate tax statements based on imputed income and did not have to file personal income taxes this month. However, Sergei Parkhomenko of the Association of Taxpayers advocacy group, said other factors were to blame for the decrease in filers, mainly the government's decision last year to raise the lowest amount of income that people have to declare from 30,000 rubles to 50,000 rubles. Parkhomenko told the Russian press: 'When there is no pressure, many people decide not to fill out the declarations. The problem is that the procedure still takes so much time, and energy.'

Whilst the Russian tax ministry may be saying outwardly that it is undeterred by the low level of income tax declarations, it must be an exasperating process. Russian government finances have been crippled by chronically poor tax collection for the past decade, and tax reform was an early Putin priority, easing its way through parliament last July.

Tax avoidance has played a significant role in Russia's tax scene for as long as anyone can remember. Corporations as much as individuals have been the major culprits. Many Russians argue that it is simply not worth paying tax because their money is collected by corrupt officials who place priority on lining their own (or someone else's) pockets above ensuring revenues go where they are really intended. The crux of Putin's radical tax reforms was to set taxes so low and the penalties for evasion so high that compliance by individuals becomes the only feasible option.

Many cynics, however, do not believe the President's promise that the 13 per cent flat rate of income tax will "remain in place for years." They say that Putin's real aim is to get people into the habit of filing their income declarations. Then the government can raise taxes as high as it likes, and there will be little anyone can do as by then they will be well and truly trapped in the Russian tax net. And if that's not enough, the tax ministry is aiming to improve the performance of regional tax offices by creating a new Internet portal, in addition to its existing www.naolog.ru, which will service its approximately 80 regional offices. Russia's die-hard shirkers of fiscal responsibilities look to be facing an uphill battle.

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