Cabinet Scrambles to Amend Tax Code

The government approved draft tax proposals aimed at improving strained relations between business and the authorities on Thursday, but the issue of repeat inspections remained unsolved.

The news, just days after President Vladimir Putin used his state of the nation speech to call on tax inspectors not to "terrorize" business, comes after repeated pleas by business leaders for a clarification of tax rules.

Opening the Cabinet meeting, Prime Minister Mikhail Fradkov said he hoped business would see the amendments to the Tax Code as a "positive signal from those in power." But entrepreneurs are not entirely happy.

Inspections of major companies are front-page news in Russia: They can produce tax claims like those that drove Yukos into the ground and landed its founder, Mikhail Khodorkovsky, in court.

Business leaders have argued that only a court should be able to allow inspectors to revisit a firm's books, but the draft suggests a "more senior" tax body could also greenlight a repeat check.

The Cabinet ordered Finance Minister Alexei Kudrin to hammer out a compromise on this by May 14, so the amendments can go to parliament before the end of the spring session.

Deputy Finance Minister Sergei Shatalov said a commission could be set up to handle requests for new inspections, possibly partly under the auspices of Kudrin, who is known to have been uncomfortable with last year's flurry of back tax claims.

Russia badly needs to mend fences between business and the state if it is to win much-needed investment, stem capital flight and modernize its economy, freeing it from heavy dependence on oil and gas, analysts say.

Potential investors turned tail after watching the travails of Khodorkovsky and Yukos, the one facing up to 10 years in jail on fraud and tax evasion charges, the other crushed under $27.5 billion of back tax claims.

Many others have fallen into the taxman's clutches, including the country's No. 2 mobile phone company, VimpelCom, and BP's Russian venture, TNK-BP.

The amendments also propose limiting the time span of inspections to two months in most cases, or three months if a company has subsidiaries. But this can, in exceptional cases, be extended.

"In practice, checks rarely last for more than three or four months, but now inspections can absolutely legally drag out for a year," a member of the group who worked on the draft told Vedomosti.

The draft also allows companies to delay payment by a year, up from six months previously. The government could at its discretion extend the deadline to three years.

Fradkov said the government understood what was at stake, and was trying to meet business halfway.

"My only request is that we don't deprive the taxman of adequate levers to do his job," he added.