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. Last Updated: 07/27/2016

Tax Proposals Find Few Friends

Ah, tax season. As the April 15 filing deadline looms for U.S. taxpayers, Russian businesses -- and the state -- have plenty of their own tax issues to sort out. A widely ridiculed proposal from the country's tax chief last week was just the first of several pitches that Prime Minister Vladimir Putin will hear in the next few weeks.

The government has broadly accepted that it will be running a major deficit this year -- its first in a decade -- since oil prices collapsed, dragging with them key revenue from extraction and export taxes. The trick now is making sure that the deficit does not pass 8 percent of GDP, in which case Russia would run through its Reserve Fund too quickly.

Thanks to friendly competition between the Economic Development Ministry, tasked with boosting growth, and the Finance Ministry, which answers for the state's fiscal health, the government has never been at a loss for competing ideas on how to raise cash. Throw in a healthy oil lobby headed by Rosneft chairman and Deputy Prime Minister Igor Sechin and occasional input from the Federal Tax Service, and you might end up with more plans than taxes.

Now that Economic Development Minister Elvira Nabiullina and Finance Minister Alexei Kudrin have agreed to postpone their long-running dispute on cutting the value-added tax, all attention has turned to a fight to push back a tax increase that would bolster the thinning Pension Fund.

In October, the government decided to raise the social security taxes that businesses pay by as much as 8 percentage points in 2010. Now, however, it appears that the state may be rethinking its reform of the unified social tax -- or at least postponing it -- as businesses struggle to stay in the black.

Prime Minister Vladimir Putin was expected to make a decision on postponing the reform Monday, and several ministers have already shown their support for a delay.

Nabiullina said last month that raising the tax burden on businesses was undesirable given the current environment and that her ministry was putting together a new proposal on the unified social tax.

Speaking at the same conference, Kudrin concurred. "I'm also for not raising taxes in the near future," he said. "Now, during the peak of the crisis ... we shouldn't undertake any new measures that would make work more difficult for businesses," he said.

Businesses currently pay a unified social tax on employees' salaries, with revenue going into the Pension Fund. Under the reforms, the tax would be split into three separate fees for pension, medical and social funds, with varying hikes depending on the tax.

Reactions to that plan were mild, though, compared with the reception for a plan from Federal Tax Service director Mikhail Mokretsov. Russia's top taxman sent Putin a letter proposing that the state abstain from increasing the unified social tax and instead impose a levy on all financial transactions at a fixed rate of 0.5 percent, Interfax reported, citing a copy of the letter.

Five tax experts and economists interviewed for this article called the proposal "stupid," "unfair," "ugly," "irrational" and "out of a fantasy world."

Requests for comment from the Federal Tax Service went unanswered Thursday and Friday.

While 0.5 percent might seem like an innocuous figure, the charges would add up in industries that rely heavily on suppliers and middlemen, said Pyotr Medvedev, head of tax and legal practice at Ernst & Young.

AvtoVAZ, for instance, would likely have to pay at least 2 percent more for each car, he said.

Mokretsov's proposal could also push businesses away from formal transactions and encourage corruption.

"The proposal would mean a movement away from the banking system toward doing deals in cash," said Alexandra Suslina, of the Economic Experts Group. "It's a serious step back."

The tax on financial transactions is not a new idea and will likely get shot down again as it did in the mid-1990s, said Sergei Aleksashenko, a former Central Bank first deputy chairman and director of macroeconomic research at the Higher School of Economics.

"It's just a stupid idea, and I think that this is evident even to many people in the tax service," he said. "There is just no easy solution [to the deficit problem] right now. All the revenue sources are disappearing, and it's not easy to collect taxes in a shrinking economy."

A Finance Ministry spokesman said Friday that the ministry would not comment on the tax reforms until the following week. Written questions to the Economic Development Ministry on its expected tax proposal went unanswered.

While the government does need to find ways to fund the pension program, raising taxes cannot be the answer, said Mikhail Orlov, head of the State Duma's expert council on tax legislation.

"Right now, it's necessary not to be fighting the fact that there are no taxes but to be securing conditions in which employers can work more actively and gross domestic product can rise. Then we will have taxes," Orlov said.

"If you're sick with the flu and have a high temperature, you don't try attacking the temperature," he said. "You cure the illness."