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. Last Updated: 07/27/2016

Tax Take Down As Banks Buy T-Bills

A government official Wednesday blamed a dramatic two-year decline in the amount of profits taxes paid by Russia's banks on their increasing investment in the previously untaxed T-bill market.

Sergei Pastukhov, head of the banks section at the Federal Tax Service, said profits taxes paid by banks have fallen to 5.2 percent of total profit taxes collected in 1996, down from 6 percent in 1995 and 12 percent in 1994.

"The rush to T-bills was the main reason for the drop in profits taxes from banks," Pastukhov said. He also attributed the drop to the growing number of unprofitable Russian banks. A third of Russian banks made losses in 1996, according to official figures.

Profits taxes from the Russian economy as a whole amounted to 41 trillion rubles ($8.1 billion) in 1995 and 32.5 trillion rubles in 1996. Total federal tax revenues for the two years were 170.5 trillion rubles and 218.7 trillion rubles respectively, according to Finance Ministry figures.

The T-bill market's high yields have been an irresistible lure for bank investment since its inception in May 1993. The government's first T-bill issue of just $948,000 worth yielded 103 percent annually.

As the profitability of currency speculation waned, banks turned to the untaxed state securities for profit, which by May 1995 were yielding 140 percent interest on volumes as large as $1.08 billion.

A 15 percent tax on T-bill profits was finally introduced at the end of January 1997, but details of how the tax will be levied are still awaiting ratification by the Ministry of Justice, Association of Russian Banks representative Vladimir Rodyushkin said.

Mikhail Bazarya, executive director of the bank association, said banks generally have been unruffled by the new tax, which was compensated for by a rise in yields on T-bills, and would not have objected to its earlier introduction.

"I remember Sergei Dubinin talking to a top banker early last year, just before Dubinin became Central Bank chairman," Bazarya said. "The banker said it would be better to tax T-bills."

The profits tax on banks for activities other than T-bill investment is levied at 43 percent. Bankers complain that various costs, including advertising, have been treated as profit under present legislation.

"There has been recent reform, which puts some advertising down to costs," said Sergei Komlev, chief analyst with United Financial Group in Moscow. "But as things stood before, banks were often paying 70 [percent] to 80 percent of their profits in tax."

Komlev said banks are more concerned about the Central Bank's reserve requirements against bad debts. The deposit requirements are currently about three times higher for ruble lending than for hard-currency lending, but the Central Bank is expected to announce a lowering of the differential soon.

"That will be good news for banks with big ruble assets, but bad for banks with big hard currency assets," said another analyst.