The next three years are poised to become a turning point for the Russian tax system. The deteriorating macroeconomic environment leaves the country with no choice but to provide tax incentives to achieve long-term economic growth and a more competitive position globally. The balancing act in taxation is to encourage business activity, while avoiding budget deficits. A close and comprehensive interaction between the Government and the business community is key to the proposed tax system tune-up.
In his address to the Federal Assembly, President Vladimir Putin emphasised the need to put in place a new stable long-term taxation framework by 2019.
- In 2016, the tax burden on the Russian businesses remained flat y-o-y (29.1% of the GDP). According to the Russian Ministry of Finance, this was in line with the OECD average of 34%, while in the PwC rating the Russian tax system was ranked 45th out of 189 countries. Last year, Russia enjoyed increased revenues from personal income taxes (PIT), value added tax (VAT) and corporate income tax (from 1% to 2%), as well as social security contributions and excise taxes (7.1% and 20.4%, respectively). Changes to tax policies and the drop in oil prices in Q1 2016 resulted in further reduction of tax revenues from the oil and gas industry.
Russian companies cite high tax rates as one of the main impediments to business development.
- According to the Russian Federal State Statistics Service, in March 2017, nearly 40% of processing businesses and 30% of mining companies viewed taxes as a hurdle.
- The overall economic unpredictability, including uncertainty about the post‑2019 taxation system, may be an even greater negative risk factor. The HSE Institute for Statistical Studies and Economics of Knowledge cite this as a serious impediment to long-term investment planning.
The highlights of the proposed tax reforms include:
- Prevention (or, ideally, reversal) of increases in the tax burden through the internal fine-tuning of the tax system, including by decreasing direct taxes and raising the indirect ones. The Russian Minister of Finance Anton Siluanov believes that tax initiatives should be developed based on the estimated tax burden of 31.6% of the GDP in 2019. The Russian Ministry of Finance has proposed a set of changes reducing the overall social security contributions rate to 22% and raising the VAT rate up to 22%, while preserving the existing benefits and exemptions. The Government is also considering new investment incentives. According to the Russian Prime Minister Dmitry Medvedev, the corporate income tax for high-tech investors may be as low as 5% (instead of 20%).
- A new taxation system for the oil and gas industry is yet another pivotal element of the tax fine-tuning proposed by the Ministry of Finance. The expectation is that replacing the mineral extraction tax (MET) with the added income tax (AIT) would boost Russia's oil production. The AIT would be levied on profits from commodity sales less marginal production and transportation costs. The latest reform draft submitted to the Russian Government on 19 May 2017 implies a voluntary transition to the AIT scheme for all newly developed fields and mature West Siberian fields with overall production of no more than 15 million tonnes per year. The AIT rate proposed by the Ministry of Finance is 50%, with final parameters and conditions to be approved after the implementation of pilots starting in early 2018 and involving such majors as Gazprom Neft, LUKOIL, Surgutnftegaz, and RussNeft.
More legislative changes are yet to come. They include:
- Revision to non-tax payments and levies that are not included in the tax burden calculations, and extension of the Tax Code regulations to other payments that are deemed to be "taxes” by their nature.
- Introduction of PIT exemptions for pension capital investors by 1 January 2019.
- Minimisation of the statutory reporting and corporate audit requirements.
- Streamlining of tax administration, improvements in tax collection, and accelerated implementation of automated tax administration solutions.