Install

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

. Last Updated: 07/27/2016

New Budget's Tax Regime Under Fire

New tax proposals in the draft federal budget drew fire from a wide range of enterprises and observers Wednesday, but many critics thought the government's plans were unworkable and unlikely to survive parliamentary review.


In an effort to boost lagging revenues, the budget submitted to the State Duma this month proposes a host of new levies, including new capital gains taxes, revocations of tax exemptions for the mass media and construction industry and a change in VAT collection from manufacturers.


Mikhail Zadornov, head of the Duma's budget committee, detailed the changes Tuesday, calling them "dubious in terms of collectibility" and saying deputies would be loath to approve many of them.


Those affected by the proposals said the ideas, if enacted, would simply drive many firms out of business and might fail to bring in the projected revenue for government coffers.


"Some of the measures make no sense," said Dmitry Falkovich, a fixed-income analyst with Alliance-Menatep, explaining that a plan to slap a 15 percent tax on yields on government securities was contradictory because it would only serve to drive up dividends on the treasury bills.


"The government, which in this case is both a borrower and a tax collector, would pick up the 20 trillion rubles it is seeking," Falkovich said. "But it would have to pay more to bondholders and would end up neutralizing its earnings."


A tax analyst at a Western law firm said a proposal to increase the capital gains on share trading from 15 percent to 35 percent appeared aimed at foreign firms since Russian companies already paid at the higher rate. But he said legal loopholes would help traders dodge the government levies.


"Most companies required to pay higher taxes on capital gains will merely restructure themselves in Cyprus, with which Russia has a double taxation treaty," the lawyer said.


Sergei Kochetov, a special correspondent on tax issues with Commersant Daily, said revoking tax benefits for the mass media could have serious negative consequences on the free press.


"Most Russian newspapers are already strapped for cash, and many could just close down if taxes are raised on them," he said.


But Kochetov said conversations with Duma deputies had led him to conclude that the proposal would not get the nod from the parliament, and the chamber would probably rebuff other proposals.


Oleg Khlinin, a deputy department head at the Russian Chamber of Commerce and Industry, said a proposal to collect VAT of about 20 percent from enterprises when goods were delivered rather than paid for -- known as accrual basis -- was "absurd" and "contradictory to all previous legislation and all pre-election promises."


"It is common knowledge that most Russian companies cannot possibly pay taxes before being paid by their customers," he said.


"It is bad enough we have to pay profit tax before we see a penny of the profits," he said, adding that a petition signed by 2,000 angry Russian entrepreneurs had so far gone unanswered.


Natalya Garaushina, a senior tax lawyer with the accountancy Arthur Andersen, said the move, if implemented, could harm the country's ailing manufacturing sector.


"Even if firms do manage to pay up, it will leave them with no money in hand to make other payments," she said. "And in Russia, businesses are never quite sure that their customers will eventually pay them."


Arthur Andersen recently stated in a newsletter that "while accrual tax collection may make sense in many countries, it simply does not in one with an intercompany payment crisis" and could finish off many small companies.


Alex Chmelev, a tax lawyer with the Baker & McKenzie law firm, said the government was forced to adopt questionable measures because of its desperate need for cash.


"The budget might benefit this year, but gains are unlikely to last long," he said, noting that collecting VAT on an accrual basis would just overburden companies, and in the long term bring in no additional revenue.











"This budget obviously needs a lot of work on the tax side," Chmelev said. "It is difficult to predict what the budget will look like ultimately.


Chmelev said, however, that lack of efficient tax implementation in Russia would render any proposals ineffective.


"The existing tax laws are adequate," he said. "If they were properly applied, there wouldn't be any gaps in the budget."