Cash-Strapped State Targets Tax Shelters

Faced with a growing budget deficit, Russian officials have been forced in recent weeks to propose just what many tax reformers wanted -- shutting down tax loopholes and shelters that have allowed many enterprises to avoid paying their fair share.


An increase in the excise tax for gas, doing away with the tax-free status of certain types of "charitable" organizations and ending tax shelters for certain key industries rank among the more ambitious measures undertaken by Russian leaders.


But economists caution that the ultimate motivation is the need for instant cash, as evidenced by the combination of pro-reform measures and potentially damaging quick-fix tactics such as revival of the excess-wage tax.


"For just now, we can talk about the current actions of the government in line with a new tax agenda for next year," said Sergei Pavlenko, director of the Center for Economic Reform. "We are not talking reforms. We are talking revenue generation."


Currently, the government faces the prospect of collecting 30 percent fewer taxes than anticipated, according to Lyudmila Danilkevich, an official at the Finance Ministry's tax reforms department.


That taxes are not carrying their load is evidenced by Russia's tax revenue as a share of gross domestic product -- 13.5 percent, according to the Economic Expert Group under the Finance Ministry. In most developed countries this figure runs between 35 percent and 40 percent, economists said.


Added to this is the dubious nature of Russia's GDP statistics, which are believed to reflect only 60 percent or 70 percent of real GDP, according to Liam Halligan, an economist with the Center for Economic Performance.


But bridging the budget gap has proved difficult, Pavlenko said. Tax collection in Russia is notoriously low, and the government's revenue-raising options are limited to high-interest treasury bills and a sluggish privatization scheme.


A third option for raising money -- printing it -- is prohibited under current legislation as inflationary, and would jeopardize the country's standing with international lenders such as the International Monetary Fund and the World Bank.


Instead, the government has taken a potpourri of steps to patch its leaking ship, some in line with those advocated by reformers, others boosting coffers in the short term but angering investors and big business."The government is taking steps to improve tax collection, in part by removing exemptions and loopholes and improving enforcement," said Charles Blitzer, chief economist with the World Bank office in Moscow. "Each one has a little bit of a different story attached to it."


Those steps included a call by First Deputy Prime Minister Anatoly Chubais on Wednesday for the revocation by Oct. 1 of the import privileges enjoyed by many "charitable" groups and sports associations.


"This decision is not liable to revision or cancellation," Chubais said, referring to groups such as the National Sport Fund and the All-Russia Invalids' Society, which are allowed to import alcohol and tobacco products tax-free to make up for government funds lost during the early days of reform.


Also this week, Finance Ministry officials announced a decree currently being prepared that will kill key corporate tax shelters harboring from 30 percent to 50 percent of earnings from taxation. The shelters, also designed in the early days of transition, were originally designed to protect money for workers' salaries.


"You have to think about tax reform now in sort of stages," said one Western economist who asked not to be identified. "We've got a phase where there are going to be some more changes, but it's not going to be a comprehensive reform."


More wide-ranging reforms are unlikely until the 1997 budget, when a package of tax reform measures is expected to be introduced, he said. Two versions are currently under development, one in the State Duma and the other in the Finance Ministry.


But reform-oriented as they might be, the current round of proposed tax measures will cause pain for a great many Russians and enterprises. Foreigners likewise are angered by some of the efforts, such as plans unveiled this week to revive versions of the excess-wage tax which businesses had expected to die out beginning of next year.


By cutting this tax, officials would cost the government $4.5 billion in revenues, by some estimates.


"It's risky to eliminate a tax unless you know you have other monies to replace it," Blitzer said, adding that it is the ease of collecting the excess-wage tax that makes it appealing.


Other easily collected levies, such as excise taxes and customs duties, could be increased -- an example of measures one economist deemed destructive to foreign investment.


Conversely, taxes that prohibit foreign investment but raise little revenue for the budget, such as profits taxes, double taxation of investment funds and charging value-added tax on loans, could be removed during the current round of initiatives, he said.


But experts note that many of the most recently announced tax policies have yet to survive the trial-by-fire which will inevitably come from regional interest groups and big businesses.


"The past month or two represented a significant effort to both improve the tax system and to improve collections," said Blitzer. "There's still uncertainties and imperfections in both."