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#2' 2004 print version
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TAX BURDEN TO BE REDUCED



Vladimir Shlyomin

T
he Russian government has approved a set of draft laws relating the tax reforms and transferred it to the State Duma. Some of the draft laws, including that on profit tax, are being finalized now to be submitted to the State Duma for consideration a little bit later.

The set includes draft laws on reducing a single social tax, increasing excise duties in 2005, changing profit tax and taxes to be applied to oil & gas industry. Experts expect that the tax reform will reduce the number of federal taxes from more than 50 currently applied down to 16 to significantly alleviate the general tax burden.

"Over the recent four years of tax reforms the general tax burden in Russia has been alleviated from 35-36 % down to 30% of GDP with the fuel and energy component considered and down to 29 % of GDP without this component,"- says Sergey Shatalov, deputy RF Minister of Finance. That period was marked by significant changes in the structure of tax payments to social funds, abolition of turnover and sales taxes and introduction of a single income tax at a rate of 13%. The profit tax has been significantly transformed with its rate taken 24%. VAT rate has been reduced from 20% down to 18% to be cut more by about the same value. A new tax regime has been introduced for small business to alleviate tax burden for small enterprises in 1.5 to 3 times. The recent year has seen a three-fold increase in the number of taxpayers who enjoy a simplified tax regime applied for small businesses. It is also planned to increase from 6% up to 9% the rate of tax on income received by shareholders in the form of dividends. There is an initiative to amend the rules regulating taxes applied in case of restructuring enterprises and to provide some exemptions with regard to the profit tax for production companies involved in development of natural resources. In particular, it is supposed to allow exploration companies to deduct their exploration expenses either from the operating profit or from the profit to be obtained from further development of the fields. It is also supposed that specific excise duties (on alcohol, gasoline, engine oils, diesel fuel and beer) should be set at a rate of 8.5%. A specific rate for excise on tobacco is supposed to be increased from 60 up to 70 rubles for 1000 cigarettes to keep the ad valorem rate at 5% of the price.
According to Mr. Shatalov the government intends to proceed with reducing tax burden by 1% of GDP annually.
A perspective of changing the single social tax is of great concern for businessmen. According to the effective Tax Code of the Russian Federation it is the employer, not the employee, who is responsible for paying respective taxes from the employee` s salary to the state budget, pension and social funds. The sum of tax payments is determined as a fixed percentage of the total pay-roll fund. It is the so- called "single social tax". In other words the less expenses on remuneration of labor the employer bears the less his tax burden is and the lower tax proceeds go to insurance funds. A draft law implies a reduction in the basic rate of the single social tax from 35.6% currently applied down to 26% and introduction of a three -level tax scale to stimulate higher salaries. Thus, if an average annual salary per one employee proves less than $ 10000 USD the tax shall be paid at a full rate, if the annual salary ranges from $ 10000 USD to $ 20000 USD the tax shall be paid at a 10% rate, if it exceeds $ 20000 USD the tax shall be paid at a minimum rate of 2%.
Some tax experts cast serious doubts about advisability of such a single social tax.
"None of the world countries has ever applied such a practice, - assures Vladimir Vinogradov, an executive director of the International Legal Consulting specialized on issues relating to taxation of legal entities, - If a salary is paid to you personally it is you who should pay taxes from it". According to Mr. Vinogradov the tax practice accepted in Russia can be explained by a historical habit and by the fact that its fiscal system has not been prepared yet to work with the whole mass of taxpayers. Mr. Vinogradov ironically notes that RF revenue authorities prefer dealing with a limited number of companies than with scores of their employees.
In experts` opinion if Russia proceeds with its single social tax concept the rate of the tax should be determined more correctly. Elena Yemelianova, the president of MMTs System international association, believes that the tax rate should be reduced down to 20%. According to her this is not an abstract figure: it means expenses a tax dodger bears today to transfer a share of its profits into an "illegal pay roll fund".
Federal revenue authorities don` t seem to be prone to take drastic measures. From their point of view it is not advisable now to reject the single social tax concept. According to official data the year 2003 evidenced a significant improvement of tax collection with the tax revenue increased by 12.2%. An absolute sum of the single social tax passed to the federal budget in 2003 totaled $ 12 billion USD. It is clear that nobody wants to risk this sum. Moreover, the state has to fulfill its social liabilities, which are constantly growing.
The oil and gas industry, the most lucrative business today, is considered the main source of extra tax revenues. First of all it is supposed to increase oil export duty if the price for one barrel of oil exceeds $ 20 USD with a possibility to increase the duty more if the price exceeds $ 25 USD for one barrel. It is also supposed that the severance tax should be increased if the price for one barrel of oil exceeds $ 18.55 USD. Considering export duties as the main way to withdraw excess profits, Alexei Kudrin, the RF Minister of Finance, believes that the severance tax should not be significantly increased at least for a while. To support this opinion Mr. Kudrin draws the following calculations: at a price of $27 USD per barrel of oil extra tax revenue would total $2 billion USD, at a price of $ 24 USD per barrel it would go down to $ 900 million USD, at a price of $ 30 USD it would go up to $ 3 billion USD. In each case the industry would not be affected.

There is no doubt that the oil business can without a significant detriment to its operations step up its tax payments to the federal budget. At the same time revenue authorities` proposals look pretty formalized. In particular, they neither take into account specific conditions of each particular oil field nor create an incentive to reduce production costs by implementing modern technologies. In opinion of some analysts it would be more preferable to differentiate tax rates depending on the quality of oilfields.
Denis Alexandrov, the financial director of Highland Gold Mining Ltd. holding, sees in the current tax reform more advantages than disadvantages. His main desire is to transfer to stable work as soon as possible: "Stability and predictability of the tax system are of great importance for business especially for a business like ours which is based on long-term investments".
The RF Minister of Finance Alexei Kudrin agrees that "the tax reform can` t last forever". In his opinion the reform will be finished in 2004-2005 by which time the main goal of the tax reform, that is to set tax rules effective for a long period, will have been reached.
The Russian president supports the opinion. Speaking about a necessity to finish the tax reform, Vladimir Putin has outlined the main goal of the reform: "Tax rules should be the same for all the enterprises operating in the same field while the whole taxation system should not be burdensome for business."  

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