KEY CONCLUSIONS:
- Starting from 2019, the Russian tax system will be upgraded for the purpose of boosting the economy
“The argument is no longer that the taxes should be changed to balance the budget system. <...> The primary goal of reforming the tax system should be to create conditions for the economy to grow, to make the situation more predictable for business and for investors.”
“There will be no changes in the tax burden. The key proposals to change the system will be made this year and the law will be drafted next year, to take effect in 2019.”
“Last year, the rate of tax collections far exceeded that of the economy's growth. Year to date, the income has grown by 25%, which is much higher than the GDP growth rate. The oil and gas income has increased the most, but other income has also been growing by about 15%. All of that was made possible through better administration,” said Anton Siluanov, Finance Minister of the Russian Federation.
CHALLENGES:
- The reform may result in a higher tax burden associated with labour costs
“A decrease in insurance fees from 30 to 22%, as well as an increase in VAT to 22%, are being discussed now. <...> The overall rate of 30% is currently applied to smaller salaries only, while the insurance fees for high (in terms of the Russian market) salaries of above RUB 750,000 a year are at 15%. To replace the tax rate of 15% with a single rate of 22% would effectively mean to impose a tax on progress, as it will result in a higher tax burden for the most successful companies. An increase in VAT would also mean higher labour costs, because the payroll is part of the added value. It would be difficult, if not impossible, to shuffle off the tax increase to consumers due to the drop in purchasing power. Therefore, if applied in Russia, European companies' 22/22 manoeuvre may result in an increase rather than a decrease of the tax burden associated with labour costs,” said Frank Schauff, Chief Executive Officer, Association of European Businesses (AEB).
- The reform would not resolve the issue of non-tax payments growth
“In Russia, there are about 50 mandatory payments that are surprisingly similar to taxes and fees. These payments are not envisaged by the Tax Code and can have any label whatsoever – charges, withholdings or contributions, etc. For a number of industries, these payments are becoming quite a burden; for instance, there are new environmental charges,” said Frank Schauff.
- Growing tax and insurance debt
“Unfortunately, the tax debt keeps increasinging, and the same trend can be observed with the state non-budget funds,” said Tatiana Golikova, Chairwoman, Accounts Chamber of the Russian Federation.
SOLUTIONS:
- Improving tax administration
“In terms of tax collection, we are going to maintain the state budget by improving the tax service and the customs service, as well as by merging their risk management systems; by combining the efforts of the major administrative bodies in tracking goods; by interconnecting IT systems, etc. <…>
“We will be aiming to reduce, not increase, the tax burden of honest corporate taxpayers at the expense of shadow businesses that do not pay taxes under the law,” said Anton Siluanov.
“We are expecting a report from the tax service that will allow us to accurately assess the potential of the insurance fee rate that has been in place up till now. <…> We need to determine whether its reduction will actually make [businesses] pay taxes,” said Tatiana Golikova.
- Seeking balance
“When it comes to prioritising indirect taxes over the direct ones, we need to be careful not to increase the tax burden associated with labour costs,” said Vladimir Mau, Rector, Russian Presidential Academy of National Economy and Public Administration.
”I disagree that increasing indirect taxes (VAT) is a good solution in our current situation, as it will cause tax-paying businesses to raise prices,” said Alexander Zhukov, First Deputy Chairman of the State Duma of the Russian Federation.
- Making tax system more flexible to stimulate investment
“In terms of stimulating investment, we have a special tax benefit for investors, which has been proposed earlier this year and will be implemented starting next year,” said Anton Siluanov.
“In Switzerland, we have chosen a system that allows different parts of the society – the communities, the provinces and the state – to decide by themselves what kind of tax system they would like to have. <…> Transparency and predictability are extremely important. <…> Trust is really the key issue for any reform,” said Jörg Gasser, State Secretary for International Financial Matters, Federal Department of Finance of the Swiss Confederation.
“More effective tax benefits, faster VAT refunds for exporters, and budget subsidies all depend on the amount of taxes paid to the government,” said Frank Schauff.