The Russian Legal Information Agency (RAPSI) invites legal professionals, members of parliament and executives from the interested government agencies to take part in discussing tax law issues. The first in our series of publications is an analysis by Vadim Zaripov, an authoritative expert on the Russian tax system who has  reviewed its condition over the recent 15 years.

Vadim Zaripov, the head of the Pepeliaev Group’s Analytical Department

Noble objectives

Fifteen years ago, on May 8, 1996, in the run-up to the presidential election, Boris Yeltsin signed Decree No. 685, which served as the starting point for comprehensive tax reform in Russia.

The decree identified the following main directions of tax reform:

- easing the tax burden on producers;

- cutting the number of taxes (the number of taxes in the country was close to 100 in the mid-1990s owing to local authorities’ tax initiatives); and,

- creating a stable tax system and keeping taxes unchanged throughout the financial year.

The active phase of reform fell to the period between 1998 (the adoption of Part One of the Tax Code) and 2008 (the adoption of the renowned anti-crisis law that cut income tax to 20%).


It should be mentioned that at the turn of the century, the Russian tax system underwent radical changes that helped bring the system and the tax administration to a new qualitative level over 10 years. All taxpayers have noticed and appreciated the liberal provisions of Part One of the Tax Code, a reduction in the number of taxes and their codification, as well as reduced tax rates.

However, far from all the tax reform’s objectives have been achieved.

Unachieved objectives

Can one speak of the legislation’s stability if the first part of the Tax Code was revised 45 times during the period in question and the second part was revised 216 times?!

The Tax Code was expected to ensure the tax system’s uniformity and consistency. However, the code itself lacks consistency. For example, Article 4 of the Tax Code prohibits the Tax Office from issuing any legislative acts, although it is given this right under other articles of the code.

Also, an all-out reduction in the number of tax breaks and exceptions to the general taxation system was announced. Indeed, in 2001 and 2002, the number of tax breaks decreased sharply. However, one could hardly fail to notice that tax breaks typically camouflaged in law as deductions, tax exemptions and the specifics of taxation have been lavished liberally and indiscriminately during the past five years.

The presidential decree laid the foundation for tax federalism. Today, Russia’s tax system is even closer to the tax systems of unitary countries.

Plans included enhancing the role of ecological taxes. Nobody knew back then that on Dec. 10, 2002, the Constitutional Court would pass the notorious Ruling No. 284-O that signaled the demise of compulsory ecological payments.

Plans were made in 1996 to carry out a tax amnesty program targeting organizations. Instead, a tax amnesty was only launched in 2007 -- and only for private persons.

The idea of drafting a code as a direct-action law proved to be impracticable. There are as many as 42 references to the government’s bylaws in the code, not counting in references to legislative acts by the Finance Ministry and the Federal Tax Service.

A quasi-liberal reform of legal entities’ registration and liquidation led to the emergence of collective responsibility in tax legislation when the buyer-cum-taxpayer is forced to bear the subsidiary responsibility for tax law violations committed by the seller who has gone “missing.”

Formally, the Tax Code provides for 13 taxes and duties, and four special types of tax treatment. However, in practice, a good deal of taxes and duties are camouflaged as payments, contributions or deductions. Functionaries have learned as quickly as taxpayers to design schemes allowing them to get around Tax Code requirements.

The state’s and municipalities’ growing needs have paved the way for a host of in-kind taxes and duties, such as, for example, the construction of engineering facilities, social amenities, and utilities that are further transferred to local authorities alongside some apartments in new residential buildings. Such encumbrances are qualified as duties because a firm’s obligation to “pay” (meet these requirements) is a condition on which authorities issue permits to engage in construction or commit another action relevant in law.

Invoices are the most controversial innovation, owing their existence to the decree.

In many years, neither taxpayers, nor tax authorities, nor courts, have managed to comprehend the ulterior motives for their introduction.

Obviously, had the above problems been resolved, one would have every reason to say the tax reform is over and its objectives have been accomplished.

Beginning of anti-reform?

What are we witnessing today?

Taxes are rising and not only the insurance premium rate, but also the land tax, which is pushed up by the overstated cadastral value of land, the severance tax and excise duties.

Amendments to tax laws are made at the last moment.

On Dec. 30 and 31, Rossiiskaya Gazeta published four tax laws, many provisions of which took effect at the moment of their publication or from Jan. 1. In the case of airlines, the law worsening their position as insurance premium payers was even given retroactive force (Federal Law No. 360-FZ dated Dec. 23).

The process of tax codification is being reversed now, so taxes are codified not only in the Tax Code, but also elsewhere in the legislation.

On top of direct and indirect implications for the economy, the removal of the social security tax from the Tax Code has led to the deterioration of legal regulation. For example, the insurance premium law contains no provisions about taxation principles and the operation of laws in time. Other things worth mentioning include the gradual degradation of legislation compared to the Tax Code, the first part of which is regularly revised, as well as the broken continuity of law-enforcing practice and the lack of criminal liability for tax evasion.

New taxes are introduced in a covert form. In violation of the Constitution and the Tax Code, the main parameters of taxes are established by bylaws, rather than by law, something that breaches the principle of the separation of powers and erodes the parliamentarian system’s fundamentals, as the history of European revolutions demonstrated. One recent example is the tax on copying audio and video files, which was introduced under government Resolution No. 829 dated Oct. 14 with the aim to collect funds to pay royalties to authors. This tax is paid by hardware and data media manufacturers and importers, such as notebooks, handsets, players, discs and the like, at a rate of 1 percent of the proceeds from sale or customs value.

Also for the authors’ benefit, members of parliament submitted a draft law to the lower house, which provides for imposing taxes on mobile operators at a rate of two percent of proceeds.

Following the road fund’s reestablishment, a road toll was introduced for the passage of heavy trucks. Other charges being considered now include taxes to be channeled into housing and utilities development and also allocations from film distribution proceeds, contributions to the airlines’ mutual aid fund and resort fees.

Although many payments are not credited to the Treasury’s budget accounts (so-called parafiscal payments) and are overseen by organizations authorized by the government, instead of the tax authorities, they have all the signs of taxes and duties.

In addition to taxes, there are expenses for servicing tax authorities and also expenses for the compulsory insurance of dangerous facilities, which will go into effect in 2012, compulsory expenses for putting metal detectors on entrances to premises and many other expenses that just cannot be refused. No wonder that the calculation of all the compulsory payments reveals that the real financial burden on businesses drastically differs from what was officially announced.

Yet, new payments may be introduced in the next few years to cover ever-increasing government expenses. These include, for example, payments to the 2018 World Football Cup preparations fund and to the police servicing reserve fund or allocations to the Army Modernization state corporation.

Pendulum principle

The unfolding events signal a demise of the romantic period in tax legislation’s development. Uncompleted as it is, the tax reform has made a U-turn. The legislation’s fine-tuning cannot change the overall trend. As a result, today we are again witnessing a covert increase of the tax burden, more uncertainties regarding investment and business planning, lowering business safety standards and decreasing attractiveness of doing business.