. Last Updated: 07/27/2016

Duma Set to Duke Out Tax Proposals

Seven new tax bills aimed at boosting the revenue side of next year's federal budget will top the agenda when the State Duma convenes this week for what could be another rowdy budget session.

Analysts said the new laws close a number of loopholes in Russia's patch-work style tax legislation, but added that the final status of the new laws will only be fully clarified when the Duma gets down to work on the country's long-awaited tax code next year.

"Investors are still waiting for more news on the tax code and the hopeful stability brought by this," said Jay Nibbe, a tax partner with Ernst & Young, adding that several of the new taxes are likely to be "worked into the code."

The Duma's budget committee, chaired by the reformist Mikhail Zadornov, has already endorsed the package after deputies agreed on changes with the government. But although this increases the likelihood of the laws passing, there is no guarantee that the Communist-dominated lower chamber will follow the committee's recommendations.

Even after revision, the one tax measure already considered by the Duma was voted down two weeks ago and sent back for further changes.

An important part of the new regulations is aimed at reining in VAT and profit-tax exemptions granted to charitable organizations, such as the National Sports Fund, that have been costing the federal budget hundreds of millions of dollars. Most such privileges were canceled earlier this year, but the new laws formalize their abolition.

Other new measures will curtail practices that let companies pay their employees through channels that until now have escaped taxation, analysts said.

The authorities hope to close the payments loophole by levelling a 15 percent tax on interest earned from bank deposits that yield in excess of the Central Bank's refinancing rate, currently standing at 48 percent, as well as by taxing loans granted by companies and banks below market rates.

A similar measure was retracted last summer after a firestorm of criticism from bankers and other business leaders. But government officials say the revised version was scaled down to limit the state's powers to meddle in private accounts while still barring firms from paying employees through high-interest schemes.

The revocation of such exemptions is not necessarily a concern to investors, if they are applied in a way that put all on an equal footing, the analysts said.

"It is not that people want exemptions as much as they want clear rules and a level playing field for all," Nibbe said.

But another proposal, to slap a 15 percent tax on yields from securities, has proved more controversial, drawing a cool reply both among market players and tax professionals.

"It is an inefficient tax that amounts to taking the money from one state pocket and putting it into another," said an expert on securities taxation with one of the Big Six accounting firms.

The tax will dampen demand in the state debt market, making it marginally more expensive for the government to borrow; a tendency that would offset some of the revenue generated by the tax, said the accountant, who asked not to be identified.

For market players in general, the tax will also "mean a further reduction in [real] yields," the accountant said.

Annualized T-bill yields have already fallen below 40 percent from a high of more than 200 percent on the eve of the presidential elections last summer.

But from the point of view of the government, the new tax has at least one clear advantage, the accountant said: "It is easy to collect."

Another tax initiative included in the package from the conciliation commission, however, does not draw high marks for its enforceability.

A 1.5 percent tax that will be levied on purchases of cash currency has been touted by the opposition in the Duma as a way to counteract the "dollarization" of the Russian economy.

But opponents of the move have said it could lead to a revival of the currency black market that flourished during the Soviet era.

"It is difficult to know the means and mechanism of enforcement" of the new currency tax, Nibbe said.

Also, on the VAT front, there are important changes under way with the exemptions on the import of high-technology goods being revoked.

Although this could prove an obstacle to the import of certain sophisticated capital goods, another exemption allowing the import of high-tech equipment as a contribution to the charter fund of a company would remain in a force, said a Russian tax manager.

Another more far-reaching change to the VAT regime that would have obliged companies to pay the tax when shipping their goods rather than when receiving the payment was thrown out by a government-parliament conciliation commission but would nevertheless be introduced more gradually next year, the tax manager said.