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. Last Updated: 07/27/2016

Exporters Welcome Tax Code Changes

Like many exporters, Sergei Terekhov wants his VAT.

During all of 1999, Terekhov, board chairman at Tekstil Povolzhe, waited for tax inspectors in Volgograd to reimburse his company for the value-added tax, or VAT, that Tekstil Povolzhe paid its suppliers.

Under current tax laws, exporters are entitled to be reimbursed for VAT they pay to the Tax Ministry within 10 days of filing with the tax police. But in practice, the system rarely works.

"Exporters have always had the legal backing, but they never get paid," said Peter Arnett, tax partner at Ernst & Young. "It’s the cash mentality of the tax police."

"We live in a democratic society," Terekhov said. "Why does it have to be so difficult to get the taxes back that I’m owed?"

After a year of trying, Tekstil Povolzhe, a leading producer and exporter of textiles based in Kamyshin in the Volgograd region, did what most businesses in democratic societies do in such a situation — it sued.

When he submitted his VAT receipts to the tax police for reimbursement, Terekhov said, tax inspectors simply said either they had no money or Moscow had forbidden them from paying out. Despite repeated calls, no one at the offices of Volgograd’s tax police was available to comment.

Terekhov eventually settled his suit with the tax police out of court and received his first refund last December. And last week, he said, his company received the VAT it was owed on goods it exported in May 2000.

Tax inspectors told Terekhov that Moscow had forbidden them from paying out.

Under the new Tax Code, which was signed Aug. 7 by President Vladimir Putin and will go into effect Jan. 1 2001, the official waiting period for exporters expecting a VAT refund will be extended from 10 days to three months, said Vladimir Konstantinov, a tax manager with PricewaterhouseCoopers.

The new code gives tax authorities three months to decide whether or not to approve a VAT reimbursement request. If the request is approved, then responsibility for the actual payment is passed from the Tax Ministry’s tax police to the Finance Ministry.

"It’s still going to be a problem," Konstantinov said. "If money for VAT reimbursement is currently hard to find in the government’s coffers, it probably won’t be any easier to find next year."

Under the new rules, however, companies will be allowed to offset their VAT payments with other tax obligations.

This already happens in practice, said Vladimir Zubakov, vice president of TVEL, a supplier of equipment to nuclear power plants. Zubakov said that while other companies often get stiffed by the current VAT system, his company, which sells its products both domestically and abroad, has found ways around the problem.

"We also pay VAT on our internal market," Zubakov said. "So what we do is lower other taxes that we owe the government."

While many companies that rely on exports for most of their revenues find their VAT accumulating on their balance sheets, some have succeeded recently in eliciting promises of VAT refunds from the government.

The Economic Development and Trade Ministry announced earlier this week that the strategic Sakhalin-1 and Sakhalin-2 oil and gas projects, which are owned by a consortium of Russian and international companies, will receive the refunds they are owed before the end of the year — about $60 million each from VAT paid from 1995 to 1999.

Terekhov, who had to sue the tax police to get his VAT back, said the new Tax Code is a step in the right direction. "From what I see so far, these changes will somehow make it easier for us."