Publication: Monitor Volume: 4 Issue: 8

Aleksandr Pochinok, president of Russia’s State Tax Service (GNS), announced on January 9 that the Service is creating a special internal division to monitor the compliance of Russia’s largest corporate taxpayers. In addition, state representatives serving in the management of these firms are to place greater emphasis on ensuring the transparency of these companies’ finances. (Russian agencies, January 9) These measures, which took the form of government decrees signed by Prime Minister Viktor Chernomyrdin on January 6, have been launched in the hope of boosting revenue collection, which is widely viewed as one of the Russian economy’s most serious weaknesses.

This strategy is based on the fact that 17 corporate taxpayers — including the Gazprom natural gas monopoly, the UES electricity monopoly, Aeroflot, and the Railroad Ministry (to which Russia’s 16 rail companies are subordinated) — provide more than two-thirds of Russia’s tax receipts. Improvements in revenue collection at these institutions could therefore pay big dividends. Under the new decrees, these companies are now obligated to form special internal "tax" divisions through which all taxes are to be paid. In this way, the companies’ fiscal relations are to be simplified and made clearer. The GNS’s new special corporate tax office, which will initially be based in the Service’s Moscow directorate, would interact directly with these divisions and their tax accounts.

According to Pochinok, corporate taxpayers and the GNS will benefit from this arrangement, since it will help the companies to get their finances in order. As proof of this assertion, Pochinok claimed that the Railroad Ministry was able to simplify its finances while simultaneously increasing its tax payments by 40 percent following this system’s initial introduction in 1997. Pochinok also argued that Gazprom’s stock price increased last year after it agreed to pay billions of dollars in back taxes.

While Pochinok’s approach may improve the collection of corporate taxes, it could eventually squeeze the goose that lays the golden egg, as the modernization of companies like Gazprom, UES, and LUKoil will require investments of hundreds of billions of dollars during the next decade. Tax collection from households and small private firms — many of which are active in the underground economy where the culture of tax evasion is deeply ingrained — will ultimately have to increase as well. Moreover, the centralization of revenue-raising activities in a single GNS office and in new divisions of Russia’s largest corporations raises new questions about the distribution of wealth and power. The issue of the bank(s) that will service the new GNS office’s accounts could be quite controversial, for example.

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