Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Tax Crackdown Targets Shrug Off State Assault

Enterprises targeted in the government's latest crackdown on tax arrears were unfazed Monday, saying they simply lack the cash to settle their bills and that only long-term restructuring of their debts in tandem with tax reform could solve the non-payments crisis.


President Boris Yeltsin on Friday announced a "temporary emergency council" to enforce tax and payments discipline, while government ministers have stepped up their rhetoric against the large tax dodgers among Russian companies.


"It is necessary to introduce an economic dictatorship that would exercise control over the work of banks, payment transfers and tax collection," Deputy Economics Minister Sergei Vasiliev was quoted as saying by Kommersant Daily.


Heading the new commission will be Prime Minister Viktor Chernomyrdin and Kremlin chief of staff Anatoly Chubais. The heavyweight effort and the ministers' tough rhetoric, however, seemed not to perturb companies that have run up large arrears to the budget, who said federal authorities have little to gain from a clampdown.


"The people on the commission are those who were already dealing with issues of non-payments," said Sergei Vetchinin, a spokesman for metals giant Norilsk Nickel. "It is nothing out of the ordinary."


Vetchinin said an attempt by Moscow to collect all of the company's 1.8 trillion ruble ($33.1 billion) tax debt immediately could lead to "the death of this potentially very profitable enterprise." He said it is unable to pay its taxes because of more than 1 trillion rubles it bears in annual social obligations such as kindergartens and health clinics for its workers.


Norilsk is one of 20 large companies, mostly in the fuel and energy sector, that the government says account for 80 percent of all non-payments to the federal budget. Among these are Gazprom, AvtoVAZ, Norilsk and a string of oil companies, said Maxim Kulikov of the Finance Ministry's economic expert group.


Kulikov said the appointment of Chubais as deputy chairman of the commission could lend renewed impetus to the fight against tax arrears.


"Chubais is experienced in this field. He knows how to talk with the enterprises," Kulikov said.


Christopher Granville, head of research with United City Bank in Moscow, said the commission could make some headway on sorting out the tax mess. The government estimates total arrears to the federal budget at some 90 trillion rubles, most of which is back taxes, while another 68 trillion rubles is owed to non-budgetary funds, such as the pension fund.


"I wouldn't be surprised if the commission carried through at least some declarations of bankruptcies" of large debtor companies, Granville said.


He added that the commission would initially be more likely to target companies with few public sector customers, rather than companies such as natural gas monopoly Gazprom, which could react by cutting off public sector debtors.


Business executives, however, were hardly quaking.


"Sometimes it seems the government wants to both milk the cow and eat its steaks," said Alexander Zagryadsky of the Association of Russian Banks, explaining that the taxes the government imposed were too high to allow businesses to function properly.


Commercial banks' share in total tax payments has declined from 12 percent in 1995 to 3 percent this year, Deputy Finance Minister Sergei Shatalov said, according to Kommersant Daily.


But Zagryadsky said the issues of arrears and taxation can only be solved in the context of a reform of Russia's Byzantine tax system.


"The debts of many companies are absurdly high because of the numerous fines leveled by the authorities," said Andrei Krasnov, a spokesman for the Yukos oil company.


Yukos has itself paid 1.4 trillion rubles on its 2-trillion-ruble tax debt to the federal budget, Krasnov said, but he added that only a restructuring of the arrears over a 5 to 7 year period would be able to solve the problem for the majority of companies.


Norilsk spokesman Vetchinin said the metals firm is currently negotiating with regional authorities in the northern Krasnoyarsk region -- where its main subsidiary is situated -- about restructuring its debt.


Other large debtors, such as Gazprom, have blamed their tax arrears on consumers' non-payments, saying they cannot pay taxes on deliveries to non-paying consumers.


But Kulikov of the Finance Ministry challenged this logic, saying that only by insisting that companies pay their arrears to the budget can the ministry help to enforce payments discipline throughout the economy.


"We simply have to demand that they pay," Kulikov said.


Granville of United City Bank said "a real breakthrough [in relation to] the crisis of public finances is unlikely until after a substantive tax reform."


But the government has still not submitted the full draft of its new tax code to the Duma, and it is unlikely to come into force until 1998, he said.