ECONOMY

Heiko Pleines. TAXING THE METAL BUSINESS

SOURCE. Stephen Fortescue. Taxation in the Russian Mining and Metals Sector (Tax Burden and Tax Behavior of Branches of the Russian Economy. Part I). Working Paper of the Research Center for Eastern European Studies (Bremen) No. 27, July 2001. Price $4 + postage. To order send e-mail to publikationsreferat@osteuropa.uni-bremen.de]

(Synopsis contributed by Heiko Pleines of the Research Center for Eastern European Studies, Bremen)

The new tax code is Russia's first major project of economic reform to be introduced under President Putin. Its declared aims are to simplify taxation and reduce the tax burden on enterprises. The liberal reformers hope that as a result tax evasion will be reduced and the state's income from taxes increased. At the same time, the tax police have been used by Putin to put pressure on influential businessmen ("oligarchs"). In one of a series of studies of Russia's tax reform, Stephen Fortescue analyses its impact on the Russian mining and metals (M&M) sector.

The first part of the paper deals with the tax burden on the M&M sector and the main changes resulting from the present tax reform, above all cuts in profit tax and in employers' social security payments. The author shows that the M&M sector pays a disproportionately high level of tax compared to other sectors of the economy, primarily as a consequence of high tax liabilities on assets.

Professor Fortescue concludes: "The stated aim of the reform is to encourage a higher level of tax compliance through the introduction of a more reasonable tax system. One doubts very much whether the carrot offered is enough to convert high-level tax evaders into model taxpayers, particularly when there are no signs of a more effective stick being deployed. While the single social tax might reduce the level of tax-avoiding employment and remuneration practices, those are relatively marginal issues within the M&M sector. The cuts in profits tax are unlikely to have any effect on the incentives to reduce the levels of declared profits." Accordingly capital flight from the sector is expected to remain at a high level.

The second part of the paper analyses the influence of the M&M sector on economic policy, taking the tax reform as a case study. Until fairly recently the M&M sector lacked powerful oligarchs, and had to lobby through sectoral trade and business associations. In the Russian context this has proven rather unsuccessful, which might explain the relatively high tax burden on the sector.

The author also considers the implications of the tax reform for the general relationship between oligarchs and the state: "There is nothing in the new tax code or any other sphere of government activity to suggest that Putin's much-vaunted anti-oligarch "stick" is to be used against transfer pricing and capital flight. While one notes the Duma's recent acceptance on first reading of a government-sponsored bill on money laundering, it is overwhelmed in symbolic and practical terms by Putin's distressingly selective anti-oligarch campaign, the total lack of action with regard to inadequate corporate governance, the apparent immunity of shadowy offshore trading companies, and the continuing high levels of capital flight. These are not things that can be dealt with by a tax system alone, but the current tax changes appear to have minimal regard for them anyway. It might be going too far to see tax reform as a victory for the resource-based oligarchs, but it is even harder to see it as a contribution to their taming."