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. Last Updated: 07/27/2016

Taxman Haunts Investors

Foreign investors in Russia still fear heavy-handed treatment by the tax authorities even after President Vladimir Putin's call to eradicate "tax terror," the coordinator of the Foreign Investment Advisory Council, or FIAC, said in an interview.

But, with Russia enjoying a consumer boom on the back of record oil prices, most investors who have gained a foothold in the country are bullish about their prospects despite pervasive red tape and corruption.

Alexander Ivlyev, a partner at accounting firm Ernst & Young, said the tax issue would come up at the annual meeting of the FIAC, a forum set up in 1994 to create dialogue between government and business.

"This question has not been properly settled and is becoming acute. Something must be done," said Ivlyev, organizer of the FIAC meeting in October.

According to FIAC research, tax demands served against large companies rank in the top three factors influencing foreign investors' views of the Russian business climate, after economic growth and high oil prices.

In the most dramatic case, Yukos was brought to its knees by $33 billion in punitive back tax claims. Creditors this week voted to bankrupt Yukos, and the company now faces liquidation.

In the wake of the Yukos affair, widely seen as a Kremlin operation to destroy the company's politically ambitious owner, Mikhail Khodorkovsky, companies with foreign ownership were hit by a series of smaller back tax claims.

Among them were TNK-BP and No. 2 mobile phone company Vimpelcom, which is part-owned by Norway's Telenor.

This week an oil pipeline joint venture in which Chevron has a stake, the Caspian Pipeline Consortium, also received a $175 million claim for back taxes.

Ivlyev said what was needed was a proper understanding of how companies paying their taxes in good faith should interact with the tax authorities.

Other business groups have criticized amendments to tax law passed this month for failing to live up to Putin's promise and leaving too much scope for arbitrary action by tax collectors.

But despite their concerns about tax, foreign investors are upbeat about Russia, which is now into its eighth year of rapid economic growth, is running a hefty budget surplus, paying down debts and has just scrapped capital controls.

An investor poll commissioned by the FIAC found that 84 percent of foreign investors regarded their business development in Russia as positive over the past two years.

Only 14 percent of respondents in the survey said their sales had grown by less than 10 percent in 2005, while one-fifth said their business had grown by more than half.