Bringing Taxpayers Into the Open
- By Vadim Zaripov
- Jul. 04 2005 00:00
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The president's proposal was an expression of political will. He indicated the direction in which the government should move but did not provide a ready-made solution. It is important to understand, for example, that Putin's remarks covered not only "foreign" capital but also income derived from the so-called shadow economy. And he made no distinction between individuals and corporations, since the Constitutional Court has repeatedly held that corporations are associations of individuals created for specific purposes.
In a meeting with Putin, parliamentary leaders proposed that the tax authorities and other state agencies guarantee that anyone wanting to come clean about previously undeclared income would not face prosecution for tax evasion. Their proposal amounted to an amnesty for tax evaders. Under this type of amnesty, the state usually encourages taxpayers to pay off their debts by excluding them from prosecution for past violations of the tax code.
Taxes should be unavoidable. A tax amnesty should therefore not be understood as simply writing off tax debt. As Putin made clear, such an amnesty is possible only under certain conditions. Understood in this way, the president's proposal can be extended to income previously sheltered in all sorts of questionable but not necessarily illegal schemes. Many serious companies would be more than happy to remove the skeletons from their closets and pay their tax bill in return for immunity from prosecution and an installment plan that would allow them to maintain financial stability. A tax amnesty would be of far more interest to corporations than to individuals.
Declaring a tax amnesty is an extreme measure, but in certain situations a necessary one. A number of arguments can be made in favor of such an amnesty. It would be extremely unfair, for example, to punish tax dodgers today for violations committed in the past, when the tax burden was far heavier. It wasn't so long ago that we had a profit tax of 35 percent, a unified social tax of 36 percent, a value-added tax of 20 percent, as well as taxes on earnings, sales and all sorts of local fees.
Now that the tax burden has been significantly reduced, more and more people want to pay their taxes. A tax amnesty would help to change the mindset of businessmen by providing a greater sense of security and confidence in the future. It would be a giant step forward in normalizing relations between the state and the business community, and it would build a bridge between the past and the future.
When the president said that for many years our tax system was in the development stage, that amounted to an admission by the state that previous tax law was far from perfect. Before it begins prosecuting people for tax evasion, the state is therefore obliged to explain the rules of the game and to set the rules down in law. Only when the tax reform process is complete will the state have the right to punish those who evade their tax obligations with full knowledge of what those obligations are.
Taxes are the Achilles' heel of Russian business today, and they are often unscrupulously brought to bear in business disputes. Entrepreneurs who have something to lose, including their reputation, therefore have every reason to come clean and pay their taxes now and in the future.
Opponents of a tax amnesty often object that we can't let deadbeats off the hook when others obeyed the law and paid their taxes. In principle, this objection is correct. But it's nevertheless possible to reach a compromise that would create favorable conditions for those who want to repay their debt to the state.
Doubts have been raised about the outcome of a tax amnesty. Belgium, Ireland, India and Kazakhstan have declared such amnesties with considerable success, while other countries -- Germany, France, the United States -- have been less successful.
It's important to keep in mind the causes of such poor results: unfavorable conditions, a lack of confidence in the state, a lack of clarity in the amnesty law itself, the missteps of government officials. In addition, the assessment of success or failure can't be restricted to the short term. If a businessman is sleeping soundly, he will become more productive tomorrow, generating more GDP and consequently filling the state's coffers by paying more taxes.
Before settling on a plan for a tax amnesty, we must study the experience of the failed 1993 amnesty as well as the experience of our neighbors in Kazakhstan and Georgia and of other foreign countries, including Argentina, Italy, Pakistan, the Philippines and South Africa.
It is essential that the government make clear to the public that a tax amnesty is a one-time offer made at the end of a complex stage in our social development: the collapse of the Soviet Union and the construction of the new Russian state.
The term of the amnesty should be limited but sufficient to allow people to think things through, make their calculations and come to the conclusion that they're better off paying their taxes.
In addition to the amnesty, a law should be passed to define such concepts as "tax optimization" and "tax evasion," laying down the rules for taxpayers who want to give up tax shelters and other questionable schemes.
During decades of repression, people learned the hard way that those most ready to repent their sins were the first to be sent to the camps. The amnesty law should provide firm guarantees against criminal prosecution, searches and probes into the affairs of anyone who comes forward to do the right thing.
As the frequent reports of leaks from the databases of the tax authorities make clear, serious questions remain regarding the government's ability to keep tax information secret. It is essential that confidentiality be guaranteed under the tax amnesty.
The conditions are now right for declaring a tax amnesty in 2006. This is a real opportunity to give businessmen the freedom they need to take our economy to the next level. In the current climate of fierce international competition, this is an opportunity we can't afford to squander.
Vadim Zaripov, chief analyst at the law firm Pepelyayev, Goltsblat & Partners, contributed this comment to Vedomosti, where it first appeared.