Want to Skip Taxes? By Law You Can

For all those weary of forking over hard-earned rubles to the taxman, here's a tip: This year you don't legally have to.

That's because the new Tax Code that was signed by President Vladimir Putin last August repeals the old code and creates a legal vacuum with no provision for any taxes owed before 2001.

The new code, which established a 13 percent flat tax on personal income from Jan. 1, essentially abolishes the old code. Therefore, with personal income tax declarations for 2000 due in just over two months, there's no law that says you have to pay, said Peter Reinheardt, director of global employment solutions at Ernst & Young.

"Someone who is really aggressive could argue taxes for 2000 should not be filed at all," Reinheardt said, adding quickly that he didn't "recommend doing that."

Despite the legal loophole, however, it is unlikely that many people are going to want to challenge the Tax Ministry in court, said Vera Semenenko, a tax expert at Arthur Andersen.

Semenenko said engaging in a tug of war with the Russian tax authorities is a painful and costly experience.

"Most likely, very few people will want to use [the loophole]," she said. "It is more of an intellectual exercise."

Nonetheless, the issue has the attention of Tax Minister Gennady Bukayev, who said earlier this month that his ministry is trying to patch up the holes in the code.

"The legislation has not stipulated certain transitional conditions," Bukayev told the Vedomosti newspaper. "Our taxpayers are sharp. They quickly take advantage of these flaws."

Unlike the past, however, the Tax Ministry can't close the loopholes on its own, he said.

"Our task is to find the lacunae and close them by making amendments to the acting legislation," he said. "But it is much harder for us to do this now — previously, we were able to close the gaps by issuing instructions. Now we no longer have that right and can only make recommendations for changes to the [State Duma]."

Although last year's tax collection added 613 billion rubles ($21 billion) to the budget, nearly doubling the results for 1999, this year the legal vacuum could cost the government billions of rubles should enough taxpayers decide to take advantage of it.

But while many Russians may be tempted to try their fate because tax evasion remains something of a national pastime, foreigners who reside in the country are less likely to be tempted because strict registration requirements make them easy to identify and prosecute.

Basically, many expatriates said, tax dodging is more trouble than it is worth.

"Some of my Russian friends think I am crazy for declaring everything honestly," said journalist David Filipov, The Boston Globe's Moscow bureau chief who says he paid taxes here since 1994.

"But Americans pay taxes, at least so that they don't end up like Al Capone, who was eventually caught for tax evasion."

Expatriates spending more than 183 days a year in Russia are required to file a declaration.

Despite the fact that the new law invalidates many deductions, ends tax exemptions for short-term foreign workers, and requires that expatriates prove their salary, many foreigners welcome it.

The main reason is the 13 percent flat tax on earnings, one of the lowest in Europe, which replaces the former progressive system with rates between 12 percent and 30 percent.

"It is far less attractive to pay in 2000 compared to 2001 because of the flat tax," said Sam Barden, an Australian native who is a trader at Renaissance Capital.

"But at the end of the day, if we want to promote a more transparent business environment in Russia, we cannot disregard laws," he said.

The consequences of disregarding the tax law include monetary fines and, in some cases, criminal prosecution.

New penalties for late filings include a 5 percent fine per month of the amount of tax due, which rises to 30 percent if it's more than 180 days late, plus an additional 10 percent per month after that.

The fine for not filing at all is 20 percent to 40 percent of the amount due, depending on whether it wasn't filed out of negligence or intentional disregard of the law.

Dinar Akhmetov, a tax partner at the consulting firm Harvey & Associates, however, said that he is not aware of any cases where a foreigner was prosecuted for nonpayment.

Those who want to take no chances should keep in mind that the tax forms, available only in Russian, should be in the hands of tax authorities no later than May 3.

This year the Tax Ministry has made things easier by offering forms on its web site at www.nalog.ru, where users can also find help on filling them out.

Forms can be mailed in or submitted personally or through an agent, such as an accountant.

Foreigners residing in Moscow have to send or deliver their forms to Tax Inspectorate No. 38, located at 15/17 Bolshoi Cherkassky Pereulok, Bldg. 1. Tel. 206-0318.