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. Last Updated: 07/27/2016

Large Tax Hike on Wealthy Proposed

The Finance Ministry has proposed a new personal income tax schedule that would increase rates retroactively for all of 1993 for many foreigners and wealthy Russians but reduce them for low- and middle-income earners, ministry officials said Thursday.


The proposal, to be submitted Tuesday to the government for approval, would hike the top tax rate from 30 percent to 40 percent for those earning over 10 million rubles (about $8, 500) a year. Sergei Alexashenko, deputy finance minister, said the proposed tax increase would take effect for income received after Jan. 1, 1993.


"We changed the rates to keep up with inflation, which was higher than previously estimated", Alexashenko said.


Tens of thousands of foreigners and Russians earning more than 10 million rubles would be affected by the proposal if adopted. Under Russian law, most foreigners working here must pay taxes on their total worldwide income, not just the amount earned in Russia, if they live in the country more than 183 days in a year.


Top wage earners will pay 2. 4 million rubles on their first 10 million rubles and 40 percent on all earnings above that figure.


A person earning $50, 000 would pay about $19, 000 in taxes. Under the existing tax system, adopted last January, the figure would have been about $14, 500.


But because taxes were calculated monthly but payable annually, those converting dollars to rubles were able to benefit from the Russian currency's depreciation and pay far less.


Steve Sandweiss, an accountant with Arthur Andersen in Moscow, said the increased rates "would kill foreigners". While the top rate is similar to the United States and Western European countries, Sandweiss said that there are fewer deductions allowed in the Russian system, making the effective tax rate here higher.


"What this really does is hit the investing companies", said Stephen Hasson, tax partner with Price Waterhouse in Moscow. According to Hasson, many companies pay taxes for foreign employees.


He said that given Russian inflation, currently running at about 20 percent monthly, the change made sense, but he objected to the retroactivity.


"It's now very late in the year and effectively they are talking about raising it for all of 1993", Hasson said.


The new tax proposal will benefit many average Russians. The lowest tax rate of 12 percent will now apply to workers who earn up to 2 million rubles annually, instead of 1 million rubles.


Those earning between 2 and 5 million rubles a year will pay 20 percent and those with annual incomes of between 5 and 10 million rubles will pay 30 percent.


But the government, in an effort to increase revenues, will tax a broad range of services and payments employees receive that had previously been exempt.


Alexashenko said that everything paid to workers, including in-kind payments by enterprises and trade union benefits, will now be subject to taxation.


He said payments other than wages can account for up to 40 percent of a worker's income.