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Russian Tax Reforms Don't Look So Good To Practitioners

Tatiana Smolenska,, Moscow

24 November 2000

President Putin's income tax reforms, which received such good local and international publicity when they were announced several months back, are not looking so wonderful now that the Duma has crawled over them, especially since business people have realised there is only a minor reduction in social contributions, which make up the biggest chunk of the tax bill.

Prior to the reforms, personal tax could rise to 30%, but social contributions amounted to 41% of gross salary, so that 100 roubles paid to an employee on the top rate of tax resulted in 70 roubles for the employee and 30 + 41 = 71 roubles for the government, costing the employer more than double what the employee got. The natural response of employers was to pay people a minimal wage on the books, and the rest in untaxed cash, which came from a variety of sources. For a foreign company, it often came via Cyprus or in the wallets of incoming businesspeople.

The headline reduction to a uniform tax rate of 13% applies to employees, but the only change for the employer is that the social contributions are being bundled together into one tax (an improvement, anyway, by reducing form-filling and queueing) and slightly reduced to 35% instead of 41%. The on-cost to net pay will now be 48 roubles on 87 roubles = 55%.

Tax experts, accountants and government officials gathered this week at the second annual conference of the Russian branch of the International Fiscal Association (IFA) to discuss the potential consequences of new laws and draft legislation in the works and agreed that the reforms were inadequate. The conference coincides with the Duma's vote on corrections to the Tax Code, which is scheduled to take place this week.

"Is there any overarching concept of tax policy in the government? Unfortunately, no," said Andrei Makarov, former State Duma deputy and now head of the Duma's expert group on taxes. "Thank God there are so many loopholes in the reforms already passed. This means that business will survive."

Alexander Pochinok, former head of the Tax Department and now Minister of Labour, said he had a dream that legislators would one day have time to pass a coherent tax code that wouldn't need hundreds of corrections. "We need several years of quiet work without interference from lobbying groups," he said.

Vladimir Panskov of the State Audit Chamber, the Duma's budgetary watchdog, told delegates that they were deluding themselves if they thought that tax reform was actually happening in Russia. Many mistakes are made when the government is pressured to rush tax legislation through, Panskov said, and corrections that are intended to be strictly technical end up as big changes in principle.

A number of speakers noted that the reform process was happening without sufficient input from business. Alexander Privalov, an analyst with the consultancy Expert, said: "What has been put forward are compromises between the Duma and the executive branch, between the Ministry of Finance and the Tax Ministry. This is wonderful. But where is the second party? Where is business? Business interests are not being represented."

Lyudmilla Mamet, senior tax partner with with PricewaterhouseCoopers and an IFA member, put current problems in perspective: "Tax reform is going to be a long process, no matter how much we would like to attain it in one fell swoop," she said, "Like any other reform, it's going to evoke a stream of criticism. It's not a piece of candy; not everyone is going to like it."


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