Yeltsin campaign promises are likely to cost $11 billion Russian tax system is in disarray

IMF puts off loan

July 24, 1996|By Clara Germani | Clara Germani,SUN FOREIGN STAFF

MOSCOW -- Now that President Boris N. Yeltsin has been safely re-elected, there's a debt to be paid -- by Russian taxpayers.

Someone has to pay for Yeltsin's estimated $11 billion in campaign promises, such as back wages and restitution to depositors of failed banks.

Tax collection has tumbled to such dangerously low levels that on Sunday the International Monetary Fund postponed this month's $330 million credit to Russia.

The decision was taken as the state tax service acknowledged that tax revenues were 12 percent -- about $4.7 billion -- short in the first half of this year.

"In the wake of battle, I would say that politics are in debt to the economy and the time has now come to repay the debts," said Alexander Livshits, an economic adviser to Yeltsin.

"I see two priority tasks. The first task is to ensure the fulfillment of the president's election promises. And the second task is to make corrections in the economic policy."

"Concerning collection of taxes, a series of measures is being contemplated," said Livshits.

He said the first priority was to accelerate and intensify collection from the "biggest nonpayers."

Second, as an incentive to expand the tax base and bring tax evaders into the system, tax rates will be lowered on companies that have no tax arrears.

Among other tax collection "schemes being devised," he said, is the possibility of taxing so-called "shuttle traders" who do a booming business importing goods from other countries in the Commonwealth of Independent States.

This plan, he said, was considered months ago, "but the president objected on reasonable grounds because it was unclear how the taxes could drastically be collected without reducing imports."

The implication is that without that vast inflow of such imports during the election season, voters would have been unhappy.

Already, collection efforts have been beefed up in several areas.

The federal tax police report that around Moscow, 54 marketplaces have been investigated in recent weeks for license compliance and to be sure cash transactions have been registered.

And the tax director for the accounting firm Deloitte and Touche here said he has noticed a distinct uptick in recent weeks -- ZTC perhaps by 50 percent -- of tax police investigations of his clients' paperwork.

"It's a question of political will." said Anders Aslund, a Swedish economist who served as a Kremlin adviser on market reforms.

"The government has been going soft on a number of enterprises in exchange for election support."

The lack of tax collection and tax reforms that would bring more evaders back into the system has been the IMF's biggest beef with the Russian authorities for a long time.

"The drop in tax revenues has been enormous. They've done a horrible job keeping revenues up," said one Western economist close to the IMF-Russia loan negotiations.

IMF figures show that federal budget revenues have effectively dropped by one-third in three years.

In 1993, federal budget revenue was 13.5 percent of gross domestic product, and in the first six months of 1996 revenue was just 9 percent of the GDP.

Western European nations, by contrast, collect an average of 40 percent of their GDP in taxes.

"One reason they've fallen behind is because a lot of Russian companies don't have the cash," says Kevin Norville, tax director for the Moscow branch of Deloitte and Touche.

"Many haven't even paid their employees in months."

But overall, Russia's tax policy is considered the root of the problem.

Russia went from a command economy, in which the government controlled the books of all business and industry, to a market economy in which tax -- individual or corporate -- is a new idea, said Maj. Nikolai Medvedev, a spokesman for the federal tax police.

The tax police have existed only a little over three years, enforcing tax codes that are vague, arbitrary and largely untested in the courts, he said.

Anyone who works with the tax system has horror stories.

There are cases where the effective tax rate on a company is more than 100 percent of its profit.

Local and regional taxes subject a business to as many as 60 different taxes in some areas, said Medvedev. The tax police, he said, recently uncovered 2,000 regional businesses that had registered under a single suburban Moscow pensioner's address to avoid a raft of regional taxes.

For even an honest mistake, a penalty of up to 200 percent of the amount of the mistake can be levied, said Norville. In other words, if you make a $100 deduction that isn't allowable, you can be fined $200.

"People are frightened of even getting into the system because the implications of making a mistake are horrific," he said.

Thus, double accounting, off-the-book cash payments handled out of hefty suitcases, and offshore banking are all considered the normal ways of doing business here.

Meanwhile, a new tax code has languished in debate in the parliament for more than a year.

But Medvedev, of the tax police, said he thinks it is going to take a long while for Russians to work their way to total honesty when it comes to taxes.

"The psychology of Russians is that they lived in a society where the government provided free education, free medical aid and full employment," he said.

"People aren't accustomed to deciding for themselves to pay a tax. And now, they should know what they're tax dollars are paying for."

Pub Date: 7/24/96

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