RUSSIA: TAXING PROBLEMS.

In March, the State Duma will get its third chance to consider adopting the government’s new tax code. If adopted, the government hopes to instate it effective January 1999. The IMF considers the new legislation vital, both to putting the federal government’s finances on a sound footing and to correcting the inefficiencies and irrationalities of the current Soviet-era taxation system.

The new code will simplify the system by reducing the number of taxes from 200 to around 30 and eliminating many exemptions. Tax offsets, where debtor firms write off taxes against state spending which they are owed, will also be eliminated. (They accounted for 14 percent of federal revenues last year.) In order to make the new code more attractive to the Duma, the plan is that the federal tax burden will be cut by 2 percent of GDP. This is a rather contradictory claim, as one of the express purposes of the new code is to increase the level of federal tax collection. It remains to be seen just how this circle will be squared. (Interfax-Argumenty i fakty, No. 6)

The legislation should help clarify the formal rules of the game for Russian taxpayers. However, many of the problems lie in the informal rules of the game that have built up over recent years.

First, there is a chronic problem of tax avoidance, through the registration of multiple shell companies and the laundering of money through multiple bank accounts. According to Dmitry Chernik, head of the Moscow State Tax Inspectorate, 170,000 of the 572,000 registered legal enterprises in the nation’s capital paid no taxes at all last year. Some of them may have ceased operations, but others may have simply escaped the taxman’s attention. To improve collection of personal income taxes (on private entrepreneurs or people renting out their apartments, for example), the tax service is relying on tips from nosy neighbors. In Moscow "informers" exposed 230,000 cases of tax evasion last year. (Kommersant-daily, February 13)

Second, there is the problem of chronic debtors. So many firms have got into tax arrears that they simply cease paying altogether, or enter into protracted bargaining with the tax inspectorate. First Deputy Prime Minister Anatoly Chubais was instructed last week by President Yeltsin to launch another crackdown on leading tax debtors. Chubais told a government meeting on February 4, that already in January 1998, the State Tax Service collected 26 percent more taxes, and the Customs Committee 30 percent more, than in January 1997, which is an encouraging sign. (Radio Rossii, February 5, Russky telegraf, February 7)

Third, and perhaps most threatening to passage of the new tax code, is the question of revenue sharing between federal and regional authorities. Under the present system, most revenues are earmarked for the federal budget, which redistributes them to the regions for spending. Only if regional administrations are given a larger, direct share of tax revenues will they have a real interest in tackling the problems of tax evasion and debts enumerated above. Otherwise, it is in their interests to tolerate such behavior by local firms and cut their own deals with them for payment of local taxes in kind, through provision of off-the-record barter goods and services. If the regional leaders are not satisfied with the tax code, even if it passes the Duma, it could die in the Federation Council, which they control.

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