Soaring Tax Evasion 'Threatens State'

Tax evasion in Russia has skyrocketed so dramatically that it now threatens the very functioning of the state, with revenues falling far short of expectations, tax authorities said Thursday.


"I am sorry to state that the tendency for growth in the number of violations, which started two years ago, became more serious," Sergei Almazov, head of the tax police, told a press conference. "And we are not talking about old women selling cigarettes by the metro.


"These are violations on such a scale that they could threaten the state."


Recorded violations jumped 78 percent to 57,000 in 1994 from 32,000 in 1993, said Almazov. He added that evasions involving especially large amounts were up 160 percent.


Police prosecuted 2,500 criminal cases, with 200 convictions so far, he said, adding that $1.15 billion in unpaid taxes were owed in several currencies.


All told, the tax office in 1994 managed to collect only 60 percent of revenue that had been anticipated in the budget, said Vladimir Gusev, head of the Russian Tax Office.


"Despite some improvements, in general last year was a failure and we should take urgent measures to change the situation in 1995," he said.


Tax officials said more than 12,000 companies were found not to have paid any taxes at all in 1994. Private businesses were the biggest offenders, with 69 percent of violations, while state companies accounted for 13 percent of offenses and commercial banks for 12 percent.


A Finance Ministry source who declined to be identified, said, however, that personal income tax collection rates were over 90 percent. Most personal income taxes are withheld by companies.


The source said collection rates had improved substantially toward the end of last year and would show a marked improvement in 1995, when around 75 percent of potential revenues are expected to be collected.


The authorities had succeeded in collecting nearly 90 percent of value-added tax, which accounts for more than a third of the 128 trillion rubles ($26.4 million) of fiscal revenues contained in the 1995 budget, he said. Collection of excise taxes had also improved substantially, the source said, but other areas, such as property taxes, continued to lag behind.


Gusev, however, said reform of the tax system was imperative in order to improve collection rates in 1995.


"Our tax system is imperfect and complex," he said. "Corporate taxes are extremely high. No wonder companies try to avoid taxes. The first task is to improve the system."


Representatives of international accounting firms contacted Thursday agreed, saying Russia has just too many different taxes that change too frequently with rates that are too high, with too many competing collecting agencies that do not coordinate their activities with each other.


"The tax system changes too much," said John Braden, a tax partner with Ernst & Young. "People don't know what to do, so they do nothing.


"It's necessary to have some form of clarification of laws so that there is a single source of law and compliance," he said. "There needs to be a consolidation of tax collecting agencies."


Stewart Naunton, a partner at Coopers & Lybrand, said the high rates of corporate taxes led many businesses to avoid or evade paying them.


Similarly, Russia's draconian penalties for errors in filing taxes act as an incentive for individuals and businesses to avoid the tax authorities altogether, he said.


"The whole philosophy is so severe that the risks of making some small error are not much greater than the risks associated with flaunting the law," Naunton said. "The burden of compliance is absurd." Tax reform, however, still seems some way off. The State Duma, the lower house of parliament, recently failed to adopt a sweeping government reform that would streamline the country's taxation system and shift some of the tax burden from the companies to high-earning individuals.


In the meantime, Gusev said the tax office plans to reinforce control over taxpayers, intensify cooperation with other governmental bodies and simplify the tax on small business in 1995, but he provided no details as to how this would be done.


According to Almazov of the tax police, the biggest obstacle is a widespread culture of tax evasion in Russia, with nearly every large corporate taxpayer found to be in violation of tax legislation.


"Tax evasion here is often portrayed as heroism," he said. "We should change the psychology of people. Only then we will have full success."


Gusev also said the majority of violators were export companies that hide hard currency in accounts with foreign banks.


He named several top oil and fishing companies among firms that did not transfer their hard currency to Russia.By Anton Zhigulsky


and Euan Craik


THE MOSCOW TIMES


Tax evasion in Russia has skyrocketed so dramatically that it now threatens the very functioning of the state, with revenues falling far short of expectations, tax authorities said Thursday.


"I am sorry to state that the tendency for growth in the number of violations, which started two years ago, became more serious," Sergei Almazov, head of the tax police, told a press conference. "And we are not talking about old women selling cigarettes by the metro.


"These are violations on such a scale that they could threaten the state."


Recorded violations jumped 78 percent to 57,000 in 1994 from 32,000 in 1993, said Almazov. He added that evasions involving especially large amounts were up 160 percent.


Police prosecuted 2,500 criminal cases, with 200 convictions so far, he said, adding that $1.15 billion in unpaid taxes were owed in several currencies.


All told, the tax office in 1994 managed to collect only 60 percent of revenue that had been anticipated in the budget, said Vladimir Gusev, head of the Russian Tax Office.


"Despite some improvements, in general last year was a failure and we should take urgent measures to change the situation in 1995," he said.


Tax officials said more than 12,000 companies were found not to have paid any taxes at all in 1994. Private businesses were the biggest offenders, with 69 percent of violations, while state companies accounted for 13 percent of offenses and commercial banks for 12 percent.


A Finance Ministry source who declined to be identified, said, however, that personal income tax collection rates were over 90 percent. Most personal income taxes are withheld by companies.


The source said collection rates had improved substantially toward the end of last year and would show a marked improvement in 1995, when around 75 percent of potential revenues are expected to be collected.


The authorities had succeeded in collecting nearly 90 percent of value-added tax, which accounts for more than a third of the 128 trillion rubles ($26.4 million) of fiscal revenues contained in the 1995 budget, he said. Collection of excise taxes had also improved substantially, the source said, but other areas, such as property taxes, continued to lag behind.


Gusev, however, said reform of the tax system was imperative in order to improve collection rates in 1995.


"Our tax system is imperfect and complex," he said. "Corporate taxes are extremely high. No wonder companies try to avoid taxes. The first task is to improve the system."


Representatives of international accounting firms contacted Thursday agreed, saying Russia has just too many different taxes that change too frequently with rates that are too high, with too many competing collecting agencies that do not coordinate their activities with each other.


"The tax system changes too much," said John Braden, a tax partner with Ernst & Young. "People don't know what to do, so they do nothing.


"It's necessary to have some form of clarification of laws so that there is a single source of law and compliance," he said. "There needs to be a consolidation of tax collecting agencies."


Stewart Naunton, a partner at Coopers & Lybrand, said the high rates of corporate taxes led many businesses to avoid or evade paying them.


Similarly, Russia's draconian penalties for errors in filing taxes act as an incentive for individuals and businesses to avoid the tax authorities altogether, he said.


"The whole philosophy is so severe that the risks of making some small error are not much greater than the risks associated with flaunting the law," Naunton said. "The burden of compliance is absurd." Tax reform, however, still seems some way off. The State Duma, the lower house of parliament, recently failed to adopt a sweeping government reform that would streamline the country's taxation system and shift some of the tax burden from the companies to high-earning individuals.


In the meantime, Gusev said the tax office plans to reinforce control over taxpayers, intensify cooperation with other governmental bodies and simplify the tax on small business in 1995, but he provided no details as to how this would be done.


According to Almazov of the tax police, the biggest obstacle is a widespread culture of tax evasion in Russia, with nearly every large corporate taxpayer found to be in violation of tax legislation.


"Tax evasion here is often portrayed as heroism," he said. "We should change the psychology of people. Only then we will have full success."


Gusev also said the majority of violators were export companies that hide hard currency in accounts with foreign banks.


He named several top oil and fishing companies among firms that did not transfer their hard currency to Russia.