Billions of rubles are going to leave the Urals on a train

29.09.2010 — Analysis

The government of the Sverdlovsk region intends to offer tax incentives to companies who were registered in the region after Jan. 1, 2010. Experts are voicing fears that the influx of new taxpayers will not be enough to make up for the tens of millions of rubles lost from the budget. Deputies in the Duma suspect that the authorities are lobbying to protect the interests of a single major company. As these columnists for RusBusinessNews have explained, lowering taxes in a corrupt country cannot possibly lead to a more efficient economy. 

The government of Sverdlovsk intends to immediately lower the tax rate on profits by 4.5 points, down to 13.5%. These tax cuts will be in effect for five years (2011-2015) and any legal entity with at least 10 million rubles of capital stock who registered in the region after Jan. 1, 2010 can take advantage of them.

According to preliminary calculations, the Sverdlovsk region will lose 1.8 billion rubles of tax revenue during these five years, but after that, receipts will increase and should grow by 8 billion rubles between 2015 and 2020.

This money is vital to the government in the Central Urals. Vitaly Nedelsky, the acting minister of economy and labor, admitted that the regional budget is only in a position to allocate 30% of the necessary funds to carry out targeted programs. The cabinet hopes that the new laws will help plug the hole in the budget. But the officials' numbers and arguments raise doubts among experts. In the neighboring Perm territory, whose industrial potential is comparable to that of the Sverdlovsk region, tax incentives were introduced in 2006, but the results were disappointing.

According to Vladimir Shukletsov, the deputy director of the Accounts Chamber of the Perm territory, the budget has been deprived of 30 billion rubles over the past four years. Lowering the tax burden did not result in an invasion of new taxpayers - quite the opposite, during that time more taxpayers left. For example, the Perm printing plant "Goznak", the Kama hydroelectric plant, the public company "Uralsvyazinform", and the Yaiva state regional power plant all took their profit centers to other regions. The owners of the companies hardly decided to "migrate" because of the tax rate on profits. It is telling that in 2008, before the economic crisis, the outflow of capital from the territory was five times the rate of capital inflow. Despite the current tax concessions, the depreciation of fixed assets in the Perm territory is steadily growing.

Vladimir Shukletsov claims that reducing the tax burden will mostly benefit the chemical and petroleum industries and manufacturers of potash fertilizer - in other words, businesses that don't particularly need tax breaks. This type of paradox has forced Andrei Agishev, a deputy in the Perm Legislative Assembly, to call for an end to these tax incentives. But his initiative failed. It was opposed by deputies who were sent to parliament by the major commodities companies Lukoil, JSC"Silvinit", and JSC "Uralkalii".

Ilya Shulkin, the vice speaker of the Perm Parliament, says he is in favor of preserving the tax cuts. He thinks that it is important for the region to retain its existing profit centers, not just to attract new ones. And only low tax rates can do that. A decision was made to provide the tax incentives to everyone, to make things simpler administratively. Businesses used the money they saved in different ways. Some squandered it, and others used it to invest in fixed assets. The deputies decided not to interfere with this choice: tax concessions helped Perm entrepreneurs to get over the crisis with fewer losses than their colleagues in neighboring regions. Ilya Shulkin claims that today businesses in Perm are growing more rapidly.

Yuri Belousov, the head of research for the "Center for Applied Economics", LLC, believes that those in favor of lowering taxes are not taking the psychology of foreign investors into account. The way they see it, only depressed areas offer tax incentives, and tax rates generally increase in a growing economy. Anyway, that's how they do it in developed countries. For example, Boston, Massachusetts has a sales tax rate of 6.25%, while windswept Maine's is only 5%. The government is trying to use tax breaks to heat up the economies of sluggish areas. And so, investors think that the Russian regions are lowering taxes because businesses in the Urals are struggling. Yury Belousov suggests that the damage to the Perm territory's image created by these corporate tax breaks is much worse than any benefits they might bring.

Aleksandr Vilensky, the chief research associate at the Institute of Economics at the Russian Academy of Sciences, argues that it is a mistake to think that Russia's unfavorable investment environment is related to its existing tax system. There are a number of far more serious problems hindering business activity in Russia and relegating the Russian economy to the sidelines of world civilization. Primarily, these consist of corruption and administrative barriers. The government has not had much success battling these problems in recent years - in fact, things have gotten worse. So it doesn't matter if you cut taxes or not, you won't get the results you want and the economy still won't function more efficiently.

Igor Teushchakov, the general director of the private company, the "Association of Russian Taxes", believes that the business climate in the Sverdlovsk region is still far from ideal. At a meeting about how to eliminate official barriers, Governor Aleksandr Misharin makes statements about allocating land and granting construction permits, but in reality, the region needs a single office to issue these documents and it takes people years to get the rights to land. In Germany, business owners have no idea who is responsible for granting their permits, but everyone in the Central Urals knows very well who makes the decisions and how much the permits cost. Investors say that they are happy with the region in theory, but in practice they have to wait years to get a construction permit. The bureaucrats play games with state-owned companies as well as private ones. For example, one Federal State Unitary Enterprise has proposed building a logistics center in the Sverdlovsk region, but no matter what they do, they cannot get the necessary documents and are considering leaving for a different region.

According to Igor Teushchakov the problem in the Sverdlovsk region, like in many other parts of Russia, is the bureaucrats, who are more concerned with how they can personally make money off of investors than they are about the region's development. This is why there is such a lousy investment climate, which will hardly be improved by lowering taxes. Of course, tax incentives do attract investors, but a tax system alone is not enough to create a surge in business activity.

Very few in the Sverdlovsk region believe that Governor Aleksandr Misharin's team is truly concerned about improving the business climate. In the bills submitted to the Sverdlovsk regional Duma, experts saw unconcealed lobbying for the interests of one specific business, the public corporation JSC "Second Cargo Company", which was registered in Ekaterinburg on Sept. 24, 2010. This subsidiary of the public corporation JSC "Russian Rail Ways" wants to be given a three-year exemption on property taxes in addition to a sympathetic tax rate on their profits. As a result, the Sverdlovsk region will be deprived of 540 million rubles of revenue just in 2011. Government officials promise that in 2014 this company will pay 1.2 billion rubles in property taxes, and more than 5 billion rubles total between 2014-2016.

But of course, as Nikolai Voronin, a deputy in the Sverdlovsk regional Duma, predicts, after three tax years the Vtoraya Gruzovaya Kompaniya might just take off for another region with favorable taxes. And Georgy Persky, his colleague in the parliament, contends that this "clearly corrupt law, which is being lobbied for by agents of the JSC "Russian Rail Ways" who hold powerful positions in the regional bureaucracy" is being pushed through the legislature. This law will certainly not improve the region's investment climate.

That idea was confirmed by the words and deeds of Aleksandr Misharin's team, as well as by deputies from the ruling "United Russia" party. In particular, the members of United Russia, with very little discussion, voted down Georgy Persky's amendments to make tax reform more targeted. He had proposed giving tax incentives only to those businessmen who invest at least 20 million rubles in the fixed assets of companies and to companies who receive at least 70% of their income from innovation. That last new law would be entirely in keeping with the president's plan to modernize Russia, but the "bears" in the Duma ignored it.

"Providing tax incentives to everyone will stifle any attempts to encourage investment or innovation. Why try to do something new if you can get the same state aid doing things the old-fashioned way?" asks the Communist deputy Georgy Persky indignantly.

Konstantin Dzhultaev, Vladimir Terletsky