Livshits Set to Fight For New Tax System

The authors of Russia's long-promised new tax code pledged Tuesday to fight for its adoption in full this year, saying that the closing of billions of dollars in loopholes would help to create a fairer and more efficient tax system.


But the package of reforms faces a tough legislative fight, and analysts stress that it will be no instant panacea for businesses and individuals here.


Finance Minister Alexander Livshits told a news conference that the code abolishes 70 trillion rubles ($12.3 billion) of "unjust" tax exemptions out of the 175 trillion rubles of such privileges identified by his ministry. In return, he promised an "easing of the burden" on taxpayers, primarily through fairer procedures and simplification of rules rather than lower rates.


Livshits said the government formally will consider specific provisions of the tax code in the next few days. The first, general part of the code has been languishing in the State Duma for months, and Livshits said he expected a tough but winnable fight for passage.


"We intend to win in this struggle ... to ensure that the adoption of the tax code becomes the biggest event in the Russian economy this year," Livshits said, adding that the government would consider a moratorium on further tax changes for several years.


Foreign and Russian businesses have long clamored for an overhaul of Russia's cumbersome tax system that, they say, penalizes investment and profits.


Among the new measures are a 2 percent cut in the corporate profits tax, from 35 percent, and an accelerated depreciation of certain business investments.


But the closing of loopholes on value-added tax and the ending of some tax breaks for small business are sure to run into opposition from vested interests in the Duma, and regional authorities are likely to object to new limits on their powers to set fees in their own jurisdictions. Some elements are likely to face court challenges, and even within the government consensus is elusive.


"I'd be really shocked if it passed this year," said Alex Chmelev, managing director at Deloitte & Touche international accounting firm. "It's a complicated document."


Some observers earlier had anticipated the code would be pushed through the Duma in several stages, but deputies have objected to such a procedure.


Livshits said Tuesday: "It goes without saying that nothing will be introduced in the way of individual chunks this year."


Elements of the code are modeled on U.S. and European tax systems, reflecting in part the role of a small army of foreign consultants who have been working on drafting its provisions since as far back as 1993.


Western experts cite improved appeals procedures as one of the most important provisions of the new code. Taxpayers who challenge rulings will not be subject to penalties for the time their case is under review, and compensation and interest will be paid on wrongful assessments.


Businesses also have been pushing for full deductibility of expenses such as advertising, training and insurance costs, issues experts say are addressed in the new code but are bound to need further clarification.


Deputy Finance Minister Sergei Shatalov said during Tuesday's news conference that the intent of the new code is not to tighten the screws on taxpayers, noting that in its current form it would raise less money than envisioned in the 1997 budget.


But Shatalov said he hoped that relaxed penalties and fairer rules would encourage compliance and broaden the tax base.


Shatalov said one paradoxical feature of the current system would be abolished. Tax police officers who now enjoy exemptions, along with investigators and judges who pursue and sentence evaders, will be made subject to tax themselves.