Corporate income tax

The corporate income tax has three tax rates and the application is based on the type of income earned. Manufacturing income is taxed at 18 percent, service income at 25 percent, and income earned by retailers at 45 percent. One of the most interesting things is that the revenue is not intended to go to the central government. Moreover, the law is written that regional authorities can tax corporate profits up to 18 percent, 25 percent, and 45 percent.

Sales tax

The sales tax was first introduced on December 29, 1990 by USSR Cabinet of Ministers. It was decided to approve a list of goods and services whose sale on USSR territory will not incur the 5 percent sales tax. The local and regional authorities may make additions to list of goods in everyday demand and services to the population which are exempt from the sales tax (see the appendix). population.

Further Drawbacks of the Russian Tax System

Attorneys and tax specialists in Russia say the greatest problem facing enterprises is the lack of a satisfactory tax code. It is necessary that tax policy should be circumscribed and that more power should be given to the legislature. The nature of the tax structure allows some people to be heroes by breaking the rules. For example, a pharmaceutical company chief who had his security guard expel tax inspectors from his head quarters and vowed to shoot them if they returned, was elected to a seat in Parliament instead of going to jail. The penalties for non-payment of taxes is a defiency of the tax system that drives people from the tax system because they are so afraid of making a mistake that they prefer not to pay. For example, a standard 100 percent fine exists for understating income. The interest rate on late payments alone amounts to 0.7 percent a day, or 255 percent per annum, a penalty that can dwarf the actual liability. The penalty amount is presently reduced and is tied to the refinancing rate of the Bank of Russia. The penalty for each day of delinquent payments would equal 1/300 of the prime rate of the Central Russian Bank.

Russia also does not have a specialized tax court. To seek justice in tax issues, taxpayers have to find a people's court which is willing to accept the case. The courts do not have expertise in the area of tax law which is why most of the courts are reluctant to accept tax cases. The lack of legal recourse leads to corruption within the tax collection system. Russia does not have a law like the Freedom of Information Act (FOIA) or the Privacy Act which hinders the accountability of the tax service.

Aside from ample monetary reasons to evade and avoid taxes, taxes (in the Western sense) did not exist in Russia during the Soviet period and therefore the idea of a Western style taxation is unpalatable to many Russians. Taxes began to appear in the USSR only in 1991 which means that the current population has only had to deal with the issue of taxation over a short period of time. The result of this historical experience is that only between 60 and 75 percent of projected tax revenues have been collected this year.

Recent attempts to Improve Revenue

Decree No 1212 of August 18, 1996 is designed to improve tax collection by preventing tax evasion and streamlining cash and non cash turnover. Among other measures, the decree orders enterprises in arrears of payments to the government to open settlement accounts in banks or credit institution within the Russian Federation. Those accounts are referred to as accounts of enterprise in arrears. When requested by the appropriate tax authorities, banks and other credit organizations are required to provide data about the transaction of enterprises holding these accounts. Taxation organ may refuse to register the account of an enterprise in arrears in case there are no funds available on the correspondent account of the bank or other credit organizations. An interesting aspect of this decree is that the government finally began to crack down on misrepresentation "in case of noncompliance with this requirement or intentional provision of false information in the notice submitted to taxation organ enterprise in arrears that had performed the transactions in question will be fined by the taxation organ in the amount of the transaction value". It has proposed to improve the tax system by scrutinizing financial transactions through banks. If an enterprise opens a bank account, the bank or other type of credit institution must immediately inform the tax organs about the accounts for tax purposes. Such tax policy will let the tax agencies observe tax payments more efficiently as everything will be recorded.

Presidential Decree No 1212 of August 18, 1996 also introduced policies concerning cases containing the circumstances stipulated in the Law of the Russian Federation on Insolvency (Bankruptcy) of Enterprises, the Federal Department on Insolvency (Bankruptcy) at the State Property Management Committee of the Russia Federation shall file with arbitration court request to institute proceedings on insolvency (bankruptcy) against enterprises that have repeatedly violated this Decree during one calendar year. As it was with collective farms and state farms, enterprises can just change their names and continue to evade taxes. An important issue related to insolvency is loss of massive amounts of jobs and what will workers and one enterprise" towns do for a living and revenue.

On the bases of the decree, the government has widened its crackdown on tax evaders--adding several leading oil companies to a list of tax delinquents that might be forced into bankruptcy court unless they pay their arrears. The move was the latest in a series of desperate measures the government is taking to boost tax collection and mend its thread bare budget. The government hopes that by threatening major tax evaders with bankruptcy, they will scare the country's errant tax payers into filling empty coffers. Major companies targeted for bankruptcy can avoid insolvency proceedings, if their accounts showed the government owes them an amounts equal to their tax debts for fuel supplied to state organizations.

The most recent step in fighting tax evaders was Russian presidential decree No 1428, (dated (October 11, 1996, which created a Processional Emergency Commission (the Commission) on strengthening fiscal discipline. The major principals and objectives are:

. Control over the timely and full payment of taxes and customs and other compulsory payments; . The elaboration of measures to secure a full-scale collection of taxes and other compulsory payments; . Securing the legality and efficiency of the work of tax and customs, as well as tax police agencies; . Control over the timely and special-purpose use of the resources of the federal budget and state extra budgetary funds. . Take decisions to carry out checks of the financial and economic activity of legal entities and compliance by individuals and entities with the tax, customs and banking legislation of the Russian Federation; . Check the operations of tax and customs bodies;

. Organize check of the timely and special-purpose use of the resources of the federal budget and state extra budgetary funds.

In addition, the President granted broad powers to the Commission to meet the objectives of the decree and secure its accountability.

Monetary Policy

Interest rates, much to the chagrin of reformers, in the past barely reacted to currency stabilization and the ensuing drop in inflation. Little confidence existed in the sustainability of reforms while inflation expectations remained high. In 1996, interest rates finally started to come down--albeit slowly. Real interest rates, however, are still very high. As recently agreed by the Russian government and the IMF, the ruble is due to become convertible by 1997. Better access to the ruble market could thus lead to a rapid increase in international interest in the currency. Nevertheless, the ruble is trying to join the club of respectable currencies. Due to the establishment of a crawling peg, the currency's downslide is almost under control. A generally more stable economic environment and high interest rates could make the ruble more attractive. The ruble's recent past has been eventful to say the least. Between January 1992--effectively the start of economic reform under Yeltsin--and March 1995,the currency depreciated by a massive 2,130 percent. In the second quarter of 1995, an over-restrictive monetary policy led to a severe shortage of the currency which then duly appreciated by 15 percent within three months. As concerns rose that too rapid currency appreciation would further destabilize the economy, the free-floating ruble program was abandoned and a 'ruble corridor', which envisaged further depreciation but within predetermined limits, was introduced. The ruble corridor program has proven to be quite successful. The Central Bank, which has been intervening repeatedly in the market, has managed to keep its foreign exchange reserves at a satisfactory level, and the business community has been able to rely on a more predictable exchange rate trend. In July 1996, the 'fixed' ruble corridor (the upper and lower limits of which only had to be redefined every few months) was transformed into a 'variable' ruble corridor, with the band shifting on a daily basis. Under this program, monthly depreciation now stands at around 1.5 percent. By the end of December 1996, the exchange rate against the dollar should have reached Rb 5,700/US $.

Russia's monetary environment started showing promising signs of stabilizing in 1996. During 1995, inflation reached 200 percent by December. 1996 is drawing to a close and the inflation rate seems set to fall to 19 percent. The central bank has been pursuing a very consistent policy lately, so its goal of maintaining monetary stability looks credible. Moreover, low inflation is one of the conditions imposed by the IMF in return for its monthly credit and it is therefore hardly in the government's interest to start emission based means of financing the budget deficit. The main risk for inflation could come from a high budget deficit due to low tax revenues. Financing the deficit has become easier than in the past due to good international credit ratings--for example, IBCA: BB+, Moody's: Ba2.--are making it cheaper for Russia to borrow on the foreign capital markets.

A key element of Russia's macroeconomic stabilization program has been a tight monetary policy to soak up excess rubles floating around the Russian economy and fueling inflation. That policy's success is among the factors that drove T-bill yields up by 26.6 percent Monday to an annualized 121.4 percent on the secondary market. Just a month ago, yields stood at 53.33 percent, according to Skate-to Press Consulting Agency.

The reason for the jump, analysts say, is simple supply and demand - little ruble supply in the market at a time when government spending demands revenue. The banks do not have the money to invest in GKO (treasury bills) at 3 percent per month--but they will find the money to invest for 10 percent per month. Russia's monetary expansion under the IMF agreement is not to exceed 3 percent, compared with 9 percent in December. Combined with promises by Yeltsin to repay wage arrears and ease the impact of reforms on the social sphere, that tight policy has forced the government to raise yields as a lure to banks to loan the government money.

Intergovernmental Finance

The decentralization of the Russian Federation's intergovernmental financial relationships began with a series of successive tax sharing arrangements along with the regions expenditure responsibilities increasing. This sharing and reassignment strategy continued up to and on through the adoption of a new constitution in December 1993. In Russia, the tax formula sharing rates vary by region and are often negotiated by each locality with the center. This makes any assessment about the equity impact of transfers or their effects on local revenue effort difficult. A general disadvantage of tax sharing is that it does little to enhance local accountability or efficiency. Localities receive revenue regardless of their tax effort and have no discretion to set the tax rate or base. If they view these revenues as costless, their incentive to spend efficiently is lessened. The result may be undue expansion of subnational spending. In Russia shared taxes are retained by (or accrue to) the jurisdiction in which they are collected. This differs from most market industrial and developing economies where shared taxes (like the VAT in Germany) may be shared through a formula based on factors such as population, per capita income, urbanization or other factors. Derivation-based sharing as a rule channels resources to high income areas where the tax base and, therefore, revenue collections are largest. It is thus inherently counter-equalizing. This may be a problem in countries where regional inequities are serious and where the intergovernmental system lacks other instruments (such as transfers) to address such imbalances.

The intergovernmental fiscal relations of the Russian Federation continues to be highly opaque due to the bargain-based system which presently is being utilized. The bargain-based system is making accountability in fiscal policy even worse than is necessary--therefore further reducing the transparency. The size and structure of the Russian Federation contributes to the problems occurring in its fiscal relationships. It is made up of 89 regions consisting of 29 republics, 50 oblasts, 6 krais, and 10 autonomous okrugs, plus 2 metropolitan cities (Moscow and St. Petersburg) which are referred to as the 89 "subjects of the federation" in the constitution. The regions are even further subdivided into more than 2000 districts, where all the local governments within a region report to the regional governments and are subject to regional regulations, although each local government has independent" (emphasis added) budgetary and administrative status.

Effects of Decentralization

Economic decentralization has led to the transfer of a number of services with major benefit spillovers (education, health, and social welfare) to the regional and local levels. While the administration of these programs by local governments may be appropriate because they are closer to the people, the many small local governments that have been created as a result of the strong political push for decentralization cannot likely provide these services at an adequate level from their own resources. In some regions, enterprises' "public" spending exceeds budgetary social spending and, in a few "one-company towns" there is no public spending by the budget at all on non-administrative functions. Enterprises did not provide these services once privatized, and responsibility fell onto regional and local governments to finance them. But local governments will need revenue sources to finance the additional burden.

Decentralization, which led to ownership assignment and financial responsibility, has caused the regions to become more involved in the commercial sector through producer subsidies, capital transfers, and privatization. It has also led to the budgetary expenditures by the regional governments to increase from 13 percent of the GDP in 1992 to around 18 percent in 1994. Recent policy changes have suggested that this trend of more subnational spending is likely to continue.

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