Tax Man in Russia Comes Up Short

Businesses evade paying to a complex, ambiguous system

In the last week, war broke loose again in Chechnya, two bombs exploded on Moscow buses, and new charges surfaced of serious corruption among officials who only a month ago were at the pinnacle of Kremlin power.

But one of the most fundamental problems for newly reelected President Boris Yeltsin is more mundane. And who's he going to call? The tax police.

For a combination of reasons - some mysterious - Russians have not been paying their taxes this year. For the first half of the year, tax revenues are about 11 percent of gross domestic product, less than three-quarters of last year's level. And they appear to be dropping month by month. In May, the State Tax Service collected only 7 percent of that month's GDP.

By comparison, most Western European countries collect about 40 percent of their GDP in taxes, according to Roland Mash, an economist at the Russian-European Center for Economic Policy at the London School of Economics.

To make matters worse, the Russian economy is still in decline, so the GDP this year is about 4 percent lower than last year, shrinking tax receipts even further.

Shaking those tax dollars loose from the Russian economy is one of the government's most urgent tasks, according to Prime Minister Viktor Chernomyrdin, who is urging his Cabinet to work across the board on the issue.

Why the sudden drop in tax collections?

From the perspective of Russian and foreign business people here, part of the reason is the perverse nature of the ever-changing taxes themselves that makes it nearly impossible to pay taxes in an honest and reasonable way.

Alexander Orlov, director of the Russian Business Roundtable, recalls a recent meeting between 30 business leaders and a deputy minister of finance at which he told the deputy minister that every businessman there was a tax cheat, to some degree. If a business met all its tax obligations, it "will be ruined because in some cases, as you know, the sum total of taxes exceeds the entire profitability base of the enterprise," Mr. Orlov says.

"The largest reason why the compliance levels are so low is because policy is so bad," adds Peter Charow, director of the American Chamber of Commerce in Russia.

A complex, ambiguous tax code

Tax policy is improving in Russia, notes Kevin Norville, tax director for the Moscow office of the accounting firm Deloitte and Touche. But there are still situations where taxes eat up more than 100 percent of profits. A May decree by Mr. Yeltsin helped by adding to the list of expenses that businesses could deduct from their taxes. But it still remains unclear whether advertising or value-added taxes, for example, are deductible or not.

The tax code is so uncertain, complex, and ambiguous, even to its authors, that no company can ever feel safely in compliance, Mr. Norville says.

The general opinion that taxes are too complex and too high creates a social climate that accepts and supports tax avoidance, says Valentina Byelova, an economist at the Russian Business Roundtable's research institute.

As Russian enterprises adapt to a market economy they also learn how to hide profits from tax inspectors, she says.

The same social climate affects tax collectors. "The system is corrupt. That's the problem," says Stewart Naunton, a partner in the Moscow office of accountants Coopers and Lybrand. For example, "The collections of [tax] duties at the border are heavily affected by powerful vested interests, including ... legal and quasi-legal organizations," he says.

In the Soviet years, every enterprise had an accountant who automatically subtracted 12 percent from all salaries in taxes. The system was simple and effective, says Ivan Sas, a spokesman for the Russian Tax Police, which only began operation three years ago.

Capitalism has created a much more complicated picture. The tax police trained a corps of thousands of officers with the expertise to pursue tax evaders. But its ranks have been depleted by businesses who hire the officers away.

Yeltsin administration officials generally say that the low tax receipts this year are an election problem, based on the unwillingness of the administration to crack down on tax laggards whose political support it needed. This view is an optimistic one, because it suggests that the administration could boost tax receipts simply by tightening up the system.

Finding ways to up tax revenue

Yeltsin economic aide Alexander Livshitz said last week that the government was considering a range of tax-boosting policies that included stepping up negotiations with the biggest tax nonpayers, closing huge special tax exemptions across the board, cutting tax rates for consistently compliant taxpayers, and taxing the small shuttle traders who often bring in imports in their luggage.

Mr. Livshitz says that these possible measures could make up a substantial portion of lost tax revenues by the end of this year.

But another Kremlin analyst, budget expert Mikhail Delyagin, sees a more basic problem behind low tax revenues. Russian enterprises themselves, he says, are increasingly out of money.

Collecting taxes, he notes, "requires not only good tax inspection, but money in the pockets of our taxpayers."

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