Changes in the Russian tax system

The previous attempt at tax reforms in Russia was not successful. In 2014, a moratorium on tax burden increase was announced to support business on the back of the beginning of the economic crisis and the economic isolation Russia fell into. But, in actual fact, the tax burden on business still grew from 2014 to 2018 inclusive because, although tax rates remained the same, the conditions for their payment changed, and a huge number of new contributions were also introduced. The Platon system and disposable charge became the most telling changes of that kind, whereby instead of taxes, other systems were introduced to collect payments for the state, and these systems resulted in an actual increase in the tax burden on business.
Станислав Скакун, директор по экономике и финансам Интеркомп
Stanislav Skakun
Head of Finance

This is precisely why new ideas are now required to promote tax reforms further. In my opinion, the role played by the Ministry of Finance and the Ministry of Economic Development to shape the economic policy of Russia in this new economic period should be considered and looked into. 

It can be said that the Ministry of Finance has, over the past 7 years, fulfilled its role by improving tax administration. The volume of “gray” flows amounted to RUB 4 trillion 5-7 years ago. Today, this shadow sector has shrunk by more than 4 times owing to the fight against “gray” banks and other measures of economic administration. Over the past 7 years, the Ministry of Finance has also acted jointly with the Central Bank of Russia to improve tax administration and defeat the “gray” sector of the economy. 

What measures have been taken? The measures taken were, in my opinion, very effective and useful.

First, an automated system was introduced to administer VAT electronically. This allowed shutting down unlawful VAT refund cashing in schemes. 

The administration of social insurance contributions was transferred from the Pension Fund of Russia to Russian tax authorities. Two other measures were successfully implemented: the introduction of online cash register and the integration of customs and tax authorities. Customs and tax authorities officially teamed up this year but this was the logical culmination of all previous measures. 

As a result, customs authorities, social funds, tax authorities and online cash registers in the retail sector fall under a single “cap”. The entire Russian economy is under a single tax administration “cap”, and this resulted in an increase in tax collection by about 30% only in the past year. It should be noted that it was not only the past year that was successful as the quality of tax collection has grown rapidly over the last 7 years. And today, the Russian tax administration system is rightly recognized as one of the best in the world. 

Given that the Ministry of Finance has fulfilled its role by implementing these solutions, it is now necessary to take further steps to support “white” business with these new game rules and assist those players who are willing to work in this new legal environment. 

The first step is a tax maneuver consisting in a decrease in social contributions and a simultaneous increase in VAT from 18% to 20%. This is an important and interesting maneuver as it gives an edge to “white” over “grey” business. It is very difficult not to pay VAT so by raising the VAT rate, tax collection automatically increases, but there are also many schemes for payment of “gray” salaries so reducing taxes on wages helps “white” business. And, if this tax maneuver is implemented successfully, this will be the last blow that should be given to the “grey” economy. 

Other tax reform measures such as, for example, personal income tax increase, are more painful, and their positive effect is less obvious despite their usefulness. The rates of personal income tax in Russia are the lowest among developed countries so they can be raised. Such increase means a heavier tax burden on the population rather than businesses so they can continue creating jobs and develop. This is a certain step intended to support business. 

Another relevant measure is the pension reform because pension contributions have already become part of the tax system as tax authorities already administer social insurance contributions. The pension system has been subject to several reforms (investment accounts, savings account, etc.), but none were successful, and today it feels like everyone has given up on reforming the pension system in any way although it should definitely be changed. It is indeed necessary to address its financing difficulties which, we hear, could be resolved by raising the retirement age. Such increase is, in my opinion, inevitable to some extent, but it should come hand in hand with measures of social support for people of this age. For example, the Active Ageing campaign was launched recently as a pilot program in Moscow. It would be good if such programs could be launched throughout the Russian Federation as they support pensioners in remaining active. Obviously, it is also necessary in such case to improve the provision of services in the healthcare industry.