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. Last Updated: 07/27/2016

State Offers Duma Piecemeal Tax Code

The leader of the pro-government faction in the State Duma said Tuesday Prime Minister Viktor Chernomyrdin had offered to implement the proposed tax code in phases in an apparent effort to mollify deputies opposed to the 1998 budget.


Alexander Shokhin, leader of the Our Home Is Russia faction, told reporters that Chernomyrdin and Deputy Prime Minister Anatoly Chubais had agreed on a plan to phase in the tax code over two to three years, starting with the simplest reforms first. Chernomyrdin, however, did not comment on the proposal.


If the plan goes ahead, it would represent a major victory for both opposition deputies and some tax specialists, who have warned of chaos if implementation of the code is rushed through. The government has based the 1998 budget on the new tax code, which it had hoped to have in place by Jan. 1,1998.


"It sounds like a breath of fresh air," said Trevor Link, a tax partner at Arthur Andersen. "A phased implementation is sensible and realistic."


But one tax specialist expressed concern that the proposal to introduce the code piecemeal would create uncertainty for investors.


"One of the purposes of the tax code is to provide investors with certainty," said Cameron Greaves, a tax partner at Coopers & Lybrand. "Having the two systems operating simultaneously would lead to confusion."


The government's tax code faces stiff opposition in the Duma, but Russia's upper house of parliament is also expected to put up a fight.


Under intense pressure from the Kremlin, the Duma passed the code in a first reading in June. But deputies have put forward more than 500 amendments to be considered before the bill comes up for a second reading scheduled for November.


Shokhin said Chernomyrdin had floated an additional compromise proposal on the tax code at a meeting Tuesday with Duma deputies and Federation Council members, which was called to work on changes to the 1998 budget.


He said the government had proposed that the Duma's second reading of the tax code happen in two stages: first deputies would a vote on the amendments, and then pass the bill on to the regional governments which would suggest their own changes. The Duma would then vote on the revised bill in a second reading.


The proposal is a clear attempt to placate regional leaders in the Federation Council, who have criticized the code's provisions limiting their ability to play with tax rates to attract investment.


"Trying to find ways to include the regions would encourage the likelihood of passage," said Jay Nibbe, tax partner at Ernst & Young. "But one of the negative effects of sending it to the regions is that it only delays the process and encourages thousands of new amendments."


Chernomyrdin's haggling over the tax code appears to be an attempt to take the wind out of the Duma's sails amid threats of a no-confidence vote in the government, expected Wednesday, over the 1998 budget.


Whether the compromises will mollify the Duma is unclear. First Deputy Prime Minister Boris Nemtsov tried to stave off the no-confidence vote Tuesday by warning that it would rattle investors' nerves.


"The Communists willingly or unwillingly are taking consistent anti-state and anti-popular positions and are undermining the economic base of the country, which is showing signs of overcoming the crisis," Interfax quoted him as saying.


Nemtsov said the no-confidence vote could cause stock market prices to plunge and harm efforts by natural gas monopoly Gazprom, national electricity company Unified Energy Systems and oil giant LUKoil to raise funds on international markets through bond issues.


He also said the move would damage the upcoming privatizations of several oil companies, depriving the budget of desperately needed funds.