Tax lid of Russia

14.06.2012 — Analysis

The government of the Sverdlovsk region is tightening up its tax policy. Officials have threatened to oust entrepreneurs from the region if they do not increase their contributions to the state treasury. The business community is refusing to give in to these demands, advising the authorities to focus on fighting crime, not sucking the blood out of private companies. Nor do the tax agencies understand the reasoning behind this more stringent fiscal policy, because the region is reaching its target tax figures. This columnist for RusBusinessNews has tried to determine why the regional budget is short of cash and has come to the conclusion that the authorities are trying to dodge the blame.

The state budget in the Sverdlovsk region cannot afford to pay for the social services it has promised to provide. The region's governor, Evgeny Kuyvashev, has asked his subordinates to come up with ideas to increase revenue, and those officials have suggested taking the well-trodden path of increasing the penalties for tax evasion. They feel that the contributions of major taxpayers are unacceptably low, which justifies an examination of the balance sheets of those companies, as well as of their value-added-tax (VAT) deductions and numerous affiliates.

Officials decided to begin this retrospective analysis with a look at the food industry, which has impressive sales numbers since the finished products are of unusually high quality, with a ready market even beyond the borders of the Sverdlovsk region. The acting deputy chairman of the regional government, Ilya Bondarev, urged confectionary and sausage factories to be "socially responsible", meaning - to up their tax payments. According to him, these businesses are seeing increases in revenue while the tax on their income is decreasing. For example, Fat Factory, OJSC has reduced its tax payments by 50%, and the food plant Khoroshiy Vkus Good Taste, CJSC is now paying only 1/5 of what it once did. It is true, however, that some food companies showed a loss in 2011. But the authorities felt that the accounting reports being submitted by these companies are simply inconsistent with the scale of their business.

Mikhail Smolyakov, the general director of Khoroshiy Vkus, Food Industrial Complex, CJSC, told RusBusinessNews that the food plant pays all its taxes and fees on time, in full, and in accordance with the law. He claims, "Our lower income taxes are the result of our lower income". He says that in 2011 the cost of raw materials and supplies increased, as well as the firm's expenses to renovate and repair the existing facility and to install new options and equipment as required to comply with HACCP.

Nor does the Sverdlovsk regional office of the Russian Federal Tax Service see a connection between the region's budgetary problems and local entrepreneurs' attempts to avoid paying taxes. "Of course companies conceal some of their revenue from us, but we are meeting all of our tax targets. Maybe the government needs to look elsewhere to find the reason it is short on cash", advised the director of one of that office's departments.

This columnist for RusBusinessNews has tried to determine why Russian officials are chronically short on cash to meet their obligations. As usual, of course, there are a number of causes. The first and perhaps the main reason is that there is very little business activity in the country. It's not only the lazy who point to the need to improve the investment climate in Russia - it's true that almost nothing has changed. Not long ago, the public organization Business Russia reminded the Russian government that developed countries are reducing their rates for business and personal income taxes, which has a direct effect on the productivity of both labor and capital. But Russian officials have taken the opposite tack - the total insurance premiums that are deducted from paychecks increased from 26% to 34% in 2011.

The suggestions of the business community for a tax maneuver that would shift the burden onto wealthy individuals did not meet with success. This theoretical luxury tax inexplicably turned into an increased property tax on every last Russian citizen. And there is no discussion whatsoever of lowering business taxes (the government has ventured only to reduce insurance premiums from 34% to 30%), even though the tax burden in Kazakhstan - Russia's closest competitor for foreign investment - is half of that in Russia, as Boris Titov, the chairman of Business Russia, contends.

Russia's current tax structure clearly pushes small businesses to operate under the table and medium-sized business to the sidelines. According to Lyubov Tarasova, the head of the financial department of the administration of the city of Irbit, that small town in the Sverdlovsk region no longer has any major taxpayers - they have all closed down over the last 20 years, and small businesses operate off the books, concealing their payrolls. The result is that one-third of the town's budget comes from taxes on the salaries of the doctors, teachers, and civil servants whose paychecks come out of that same budget.

Anatoly Ogloblin, the deputy minister of economics and regional development for the Sverdlovsk region, claims that taxes on public-sector employees in 35 cities account for one-third of the region's budget. And this category of taxpayers contributes half the budget revenues in another ten districts. In view of this "consumption" of the budget, municipal officials have yet offer the government a single suggestion about how to increase the tax base. Obviously it is not only the local officials who are to blame in this matter.

The vertical power structure crafted years ago by Russian President Vladimir Putin relies on the excessive centralization of financial resources. By primarily directing taxes and fees to federal coffers, officials are then able to regulate the standard of living in the regional areas through grants, subsidies, and other financial transfers. In addition, Natalya Zubarevich, the director of the regional program for the Independent Institute for Social Policy, has calculated that over 75% of these transfers are allocated on the basis of less-than-transparent criteria. For example, Moscow, which has a budget of 1.32 trillion rubles, was freely granted another 76 billion rubles as the result of some backroom deals in 2011, a sum equivalent to the budget revenues of the entire oil-producing Orenburg region. So it is no surprise that this policy of "lending a hand to the rich", as in the case of the doomed luxury tax, is putting the poorer municipalities and regions deeper into debt.

The casual theft of tax revenues even further undermines business activity. According to the Russian prosecutor general, everyone has a hand in this, including municipal, regional, and federal officials. And law-enforcement agencies are no better. Aleksandr Lebedev, the owner of National Reserve Bank, claims that 150 banks that were holding federal budgetary funds have been deliberately forced into bankruptcy since 2006. Approximately $250 billion has been stolen from under the watchful eyes of the Central Bank, Federal Security Service, and Interior Ministry.

Aleksandr Lebedev, who holds a doctorate in economics, suggests that some taxes in Russia exist only so they can be pilfered. For example, much of the value added tax, which is an important component of the fiscal system, is returned to taxpayers. And approximately 20% of what is paid out is based on fraudulent documents. It can work very simply - a corrupt judge might make a decision to return taxes paid by a "bogus" firm, which seemingly failed to sell its goods. The plunder of 5.4 billion rubles from the Russian treasury was a scheme of this type that turned the fate of Sergei Magnitsky into an international cause célèbre. American officials alleged that Russian law enforcement and tax agencies also had a hand in those events and have threatened to bring sanctions against corrupt officials. Russian authorities promised to respond appropriately, after which it became clear why the government does not want to abandon the troublesome VAT tax.

It's obvious that this impunity prompted the Russian authorities who were providing "protection" to hit the ceiling, and they were not particularly troubled by the collapse of local budgets. Civil servants probably sincerely believe that it is possible to make up for the loss of plundered money by increasing the tax burden on business. Experts understand that the financial pyramid built by the authorities and known as the consolidated federal budget is beginning to disintegrate. This can already be seen in the provinces. But in this country, money always flows toward Moscow, and that city will not sense the deep cracks in the federal budget until later, when revenues from the sale of Russian hydrocarbons begin to slow.

Vladimir Terletsky