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Let's Paint a Picture: 15 Years of Reforming the Russian Tax System
In the run-up to the presidential election in May 1996, Boris Yeltsin signed a Decree which marked the beginning of large-scale reform of the Russian tax system. The reform was mostly implemented between 1998 (when Part One of the Tax Code was passed) and 2008 (which saw the adoption of the famous recession law, whereby the profit tax rate was cut down to 20%). Taxand Russia paints a 15 year picture of reforming the Russian tax system and what this means for businesses.
The Decree set the following key goals for the reform:
- reduce the tax burden on business
- cut the number of taxes (in the mid-1990s, Russia had some one hundred taxes, which was due to uncontrolled tax creation on the regional and local levels)
- build a stable tax system and ensure that it remains unchanged during each financial year.
Many of the goals have been achieved
It must be recognised that that in the past 10 years, Russia has seen fundamental changes in both its tax system and tax administration. All taxpayers have noticed and appreciated the adoption of Part One of the Tax Code, with its liberal provisions; the reduction of tax rates and the number of taxes; and the codification of tax legislation.
What has not been achieved
It can be said without doubt that the tax reform has failed to meet many of its objectives.
Part One of the Tax Code has been amended 45 times, and Part Two 216 times.
The adoption of the Tax Code aimed to ensure a uniform and consistent approach, but the Code itself is not free of inconsistencies.
There was, indeed, a dramatic reduction in the number of concessions from the general tax regime in 2001-2002, but the past 5 years have seen concessions thrown around with abandon.
The presidential decree heralded the development of tax federalism, but the similarity between Russia's tax system and that of a unitary state has become even more pronounced.
Strictly speaking, there are 13 taxes and 4 special tax regimes under the Tax Code. In reality, a great many taxes and charges have continued their existence as so-called 'stealth taxes' which may take the form of levies, contributions, etc. It can be argued that the authorities have come to be as good as taxpayers at devising schemes to sidestep the requirements set by the Tax Code.
Rather than diminishing, the financial needs of the state and municipal authorities have increased, and this has given rise to a number of in-kind charges.
The most well-known provision introduced by the Decree is VAT invoices, whose mystical interpretation has meant Russians have been struggling to understand for many years.
The beginning of a counter-reform?
Taxes are on the rise. In addition to the increased rates of insurance contributions, there has been a rise in land tax due to growing cadastral value, and increases in mineral extraction tax, excise duties, etc.
New tax legislation is enacted in the final days of 2010.
A law that worsened the position of air carriers in respect of their liability to insurance contributions was given retroactive effect.
Taxes are becoming de-codified. For instance, the customs duty was taken outside the scope of the Tax Code in 2004, although it was and continues to be a charge as it meets the criteria set in clause 2, article 8 of the Tax Code. In 2010, unified social tax was renamed as insurance contributions, as it had been called prior to 2001, but this did not change its tax nature.
New taxes are being introduced, and stealth ones at that. The key elements of such taxes are established in subordinate regulations, which violates the separation of powers and undermines the fundamental principles of parliamentary rule. Among the first examples is the 'tax on the copying of audio and video files'.
The members of the State Duma have proposed a draft law which could see a tax to the benefit of authors being also levied from telecom operators, in the amount of 2% of their sales revenue. A toll on heavy-duty motor vehicles has been introduced in connection with re-establishing road funds. There are discussions going on about introducing contributions for the improvement of public utilities, a cinema distribution levy, and contributions to a mutual assistance fund for airlines.
Such levies have the same characteristic features of taxes and charges.
In addition to taxes, there is a need to make contributions for the mandatory insurance of hazardous facilities, to mandatory payments for 'security frames' to be installed at the entrance to buildings, and to accept many other 'offers you cannot refuse'. It is little wonder that the actual financial burden on business differs dramatically from the rosy picture painted by the official propaganda.
The pendulum swings back
This situation can be characterised as the last days of the 'era of tax romance'. The reform went the opposite way even before it was completed. A little 'tinkering around the edges' of the legislation cannot reverse the general trend. What we are seeing as a result is that a hidden growth of tax burdens and an increased uncertainty for business and investment planning. Business is becoming less and less protected, and the attractiveness of doing it is dwindling.
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