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. Last Updated: 07/27/2016

Putin Tells Tax Auditors to Stop Meddling

APPutin walking to the podium in the Kremlin's Marble Hall on Monday to deliver his sixth state of the nation address.
President Vladimir Putin on Monday urged tax authorities to stop interfering with businesses and demanded legislation that would set in stone which areas are open for foreign investment.

In a broadly pro-business state of the nation address, Putin made some more specific proposals than he has in previous speeches, suggesting the abolishment of the inheritance tax and an amnesty for undeclared income.

Putin acknowledged that in their zeal to fight economic crime, tax authorities and other bureaucrats "once in a while" get out of hand and "we observe serious violations of the businessman's rights and sometimes sheer racketeering on the part of government institutions."

"Tax authorities have no right to terrorize businesses by revisiting the same problems time and again," Putin said in a 47-minute speech to both houses of parliament in the Kremlin's Marble Hall.

The address, which was broadcast live on state television, capped a year of investor jitters over a growing number of back tax investigations against companies. Back tax collection shot up more than threefold in 2004 compared with 2003, according to the World Bank, and tax authorities recently made an appeal to the Constitutional Court to water down the statute of limitations for tax offenses.

Putin stressed that tax authorities must "pay the most attention to current audits" as opposed to back tax investigations, and renounce "any sort of collection targets." Moreover, he said, a way must be found for firms to pay back taxes and fines "without destroying the economy or driving businesses into a corner."

The latest offer, however, will probably not save Yukos, which was presented with a $27.5 billion back tax bill that it was told to pay up almost immediately. The oil major lost its main production unit when it failed to come up with the money.

The ratings agency Standard & Poor's said in a report Monday that tax risk had become a major potential concern for Russian companies, even though tax claims so far have had a limited impact on most firms' operations.

The business community was watching for the president to reiterate his commitment to limit reviews of old privatizations and specifically address some of the concerns faced by foreign investors. He did not disappoint.

"Russia is extremely interested in large-scale private -- including foreign -- investments," Putin said.

He called for an amnesty on previously undeclared personal income so that it could be invested in the economy. The money would be taxed at the standard 13 percent rate as long as it is placed in Russian bank accounts.

Also, sectors that are closed to foreign investment must be spelled out in the law and not determined ad hoc, the president said, promising that such a list "would not be liable to expansion or to broadened interpretation."

In March, antitrust authorities blocked a partial buyout of Power Machines, a large-turbine maker, by Germany's Siemens because the Russian company supplies the military. Earlier this month, officials confirmed that they had canceled energy auctions because TNK-BP, a Russian-British venture, had planned to bid.

"Investors are not looking for riddles or charades" but for stability and clear "rules of the game," Putin said.

The stock market did not react to the speech at all. Some investors, pointing to the president's poor record of following up on promises made in annual speeches, questioned whether they would ever again hear about Monday's proposals.

"We note ... that not once has a major campaign ever been flagged in a federal assembly address from Putin," Michael Heath, political strategist at Aton Capital, said in a note to clients.

Heath said, however, that the investor-friendly tone of Monday's address "may spell the end of the campaign against big business. ... The fact that investment has begun to wane against a backdrop of $50 per barrel oil prices and record levels for other major global commodities is obviously causing concern in the Kremlin."

Putin urged the government and parliament to speed up legislation to cut the statute of limitations on reviews of privatizations deals from 10 to three years -- a change he offered business leaders in a meeting on March 24.

"There's just a single word in a single article [of the law] that needs to be changed," Putin said.

Making his first major tax proposal since a 24 percent flat tax rate on corporate profits was introduced in 2002, he said the inheritance tax should be abolished for the good of the ordinary Russian. "Billionaire fortunes are stored somewhere offshore, anyhow, and are not bequeathed here. But when it comes to some small dacha, a person has to pay such sums [to inherit it] that he often cannot afford it."

Currently, an heir has to pay a tax of 5 percent to 40 percent of the value of the inheritance, depending on the type of the inheritance and his relationship to the deceased, said Olga Boltenko, a tax lawyer at LeBoeuf Lamb Greene & MacRae.

The tax has been used in many countries, notably Japan, as a policy tool to redistribute inherited wealth and promote economic equality. However, levying a fee on bequeathed property essentially amounts to double taxation, and the tax is facing mounting criticism as it starts to affect middle-class families both in the West and in Russia.

Significantly, Putin did not mention a previous promise to double the size of the economy within a decade -- about the only goal expressed in a previous state of the nation address that has found an echo within the halls of government.

He reiterated several statements made in previous speeches that have not yet been followed by reforms, including a call to raise the quality and accessibility of medical services.