New Code Sets 35% Tax on Prizes

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Lovers of prizes, lotteries and all manner of promotional freebies could be in for an unpleasant shock come the new year when the new Tax Code will levy a 35-percent tax on their prizes.

The promotion companies themselves could also feel the pinch.

The law could see those ignorant of the new law forced to sell their prizes in order to get the cash to pay the tax bill.

Technically, a tax for "gifts" already exists. It is tied to the value of the winnings and can be applied at 12 percent to 30 percent. This is already causing problems for some companies.

"The rules for lotteries are simply sadistic. Not only must the person pay a considerable tax, but we are required to report this person to the tax authorities," said Yelizaveta Shkolnikova, marketing manager with the eStart Internet portal.

As of Jan. 1, any prize or gift worth more than 2,000 rubles will be subject to a fixed tax of 35 percent. Specialists have many practical questions regarding these new regulations.

Neither the advertising firms, the companies whose products are advertised, nor consumer groups dispute the fact that taxes on prizes and gifts are legally accepted practice internationally.

But due to the comparative naivete of the populace with respect to taxes, people sign agreements to participate in lotteries and competitions under the belief that a present is a present and that tax will not be applied.

Moreover, many lottery participants are poor. In some cases their income is so low before they received their prize that they were not required to declare it, and they simply donТt have the money to pay the new tax.

"People discover a note in the mail saying they must present themselves at the [tax] inspectorate," said Alina Barinova, promotion manager with the Vanguard company.

"There have been instances when people have hurled the gift in the face of the inspector then come to the company and caused a scandal. They simply donТt make the connection: taxes, state. They regard this as the work of capitalists who are getting fat off them," Barinova said.

"Of course, any prize starts looking less attractive," said Yevgeny Astakhov, tax lawyer with Baker & McKenzie.

"And in cases when a person receives an apartment or a car and they donТt have the cash to pay the tax, then they may lose the prize altogether. Interest can be charged on delayed payments: the tax amount can theoretically exceed the value of the gift. It is hard to imagine how this tax will work in reality."

Specialists are certain the amount of advertising that offers gifts and prizes will decrease.

"We try to attract simple people to our show," said Dmitry Tiyunov, deputy commercial director with the television company ViD, which owns the "Pole Chudes" show. "And the prizes are, as a rule, rather expensive. I think that the prizes will be shown in the program, but that people will later turn them down."