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. Last Updated: 07/27/2016

Tax Tactics: Ministries Blow Hot And Cold

To adapt an old adage about the weather to the rough-and-tumble world of Russian business: If you don't like the tax, wait three hours and it will surely change. For business people trying to keep track of the seemingly daily changes in Russia's tax laws, the mood is almost that bad. In recent weeks, tax authorities have attempted to collect a controversial 23 percent value-added tax on foreign loans, announced that a 38 percent excess-wage tax applies to all foreign companies and announced plans to impose a 23 percent property-rental tax on foreign firms and then rescinded it. This flurry of new taxes has sent shivers through the foreign business community, but analysts say the levies are more the result of the disorganized way taxes are imposed in Russia than a deliberate attack on foreign investment. "It's more a mess than a political game," said a Western economist, speaking on condition of anonymity. "It's a question of too many people working at the same time on the same project." "There is no coordination between the ministries," said a Western adviser to the Russian government. "The agricultural sector may want a new tax. So they stick a decree in front of (Prime Minister) Chernomyrdin -- and he signs it." While these deficiencies have existed for several years in Russia, it has come to the forefront in the last several weeks because Russia is struggling to raise 20 trillion rubles ($11.1 billion) to fulfill a promise to the International Monetary Fund in exchange for a $1.5 billion loan. This has put pressure on officials to raise the revenue quickly and has led to inter-ministry rifts over who pays. "Two and a half years ago we did not even have a tax service," said Deputy Finance Minister Sergei Alexashenko in a recent interview. "These are the first tax laws since 1917. It is natural there would be some confusion." While taxes existed in the Soviet era, nearly all property belonged to the state, making such levies little more than a bookkeeping device. The transition to a market economy has forced Russia to create almost overnight a set of tax laws and a system for collection. In most developed market economies, the inevitable tax confusion would be filtered by the national treasury department, in Russia's case the Finance Ministry. But a high-ranking ministry official said that the Finance Ministry is not even informed of all new tax decrees until after they are signed by President Boris Yeltsin or Chernomyrdin. "We are supposed to examine all decrees, but in reality that does not always happen," said Alexashenko. "Yes, this creates some problems for our tax program." The Russian Tax Service, which collects the taxes, does not report to the Finance Ministry as many Western countries do. Instead, it answers directly to Chernomyrdin. As a result, battles between different arms of government are being fought out after a tax is imposed, instead of before. For business people, who crave stability, this is a nightmare. The most controversial tax change recently is a 23 percent tax on foreign loans, which foreign business consultants decried as fatal to foreign investment. Alexashenko said recently that the tax would not cover most foreign investment and promised to publish a clarification. But Izvestia on Friday quoted Kirill Kotov, deputy head of the tax reform department at the Finance Ministry, as saying that the tax was still on the books. Kotov said the tax was introduced to protect domestic producers against foreign competition. Kotov's version, in turn, was contradicted by the Economics Ministry. Reuters quoted Vladimir Kuznetsov, the ministry's spokesman, as saying the tax was imposed to close a tax loophole. According to the Western economist, the wave of tax changes "is a case of good intentions but with perverse side-effects and with poor-quality implementation." After decades of subjugation to the Communist Party, he added, "ministries have no policy making experience." Various ministries at times decide independently, issuing contradictory rules, and then interpret decisions taken by other officials without consulting them, he said. But analysts say confusion is only part of the problem. The excess wages tax, for example, was deliberately designed to hold down salaries and curb inflation. The tax requires firms to pay 13 percent to the federal government and up to 25 percent to local governments on portions of monthly salaries exceeding about $50. It is normal for governments to use taxes to pursue social aims, such as transferring wealth from the rich to the poor. In most developed market economies, however, such tax policy is argued in an open forum which includes legislators, lobbyists, business interests and the voters themselves. In Russia, where the tax code is being built from scratch and secret decrees are penned by various ministries, a given tax often leaves open the question: Whose policy does it represent? For example, Igor Noskov, head of taxation on foreign businesses at the Finance Ministry, justified extension of wages tax to foreign firms by saying foreigners should not have privileges. Demonstrating the confusion, Yury Petrov, deputy head of the finance department at the Economics Ministry, said he did knew nothing about the extension. Shortly before, he had insisted that all tax changes are decided by a commission that includes representatives from several ministries, the tax service and the prime minister's office. Anne Barnard and Sander Thoenes contributed to this article.