A new mechanism for tax refunds in the case of overpayment is also provided in the code. If a taxpayer paid too much tax at his own initiative, the taxpayer may request the overpayment amount be credited towards his next payment or be refunded within a specified time limit. If the time limit was exceeded, the amount would be refunded with interest at a interest rate tied to the prime rate of the Central Bank. In January 1996, new rules came into effect concerning the refund of VAT if the taxpayer is involved in exports operations. It was a major problem since VAT refunds were the responsibility of local budgets. The 1996 budget, which was submitted in mid-August, provided such VAT refunds from special funds of the federal budget.
Russia's individuals income tax has several bands which range from 30 to 60 percent. The 60 percent rate is essentially the only rate in effect for Westerners. In 1993, the tax law was changed. Earlier, individuals could only pay taxes in rubles. Now, taxes on income earned in hard currency may be paid in rubles or in hard currency. Proposals to increase the Russian personal income tax rates were rejected by Russia's upper house, so the 1995 personal income tax rates remain in effect as of January 1, 1996 (see appendix). Three tax brackets now exist in the Russian Federation: 12 percent on income up to Rubles. 10 million, 20 percent up to Rubles. 50 million, and 30 percent over Rubles. 50 million. The current exchange rate is one dollar to approximately 4,700 rubles. While many individuals may complain that the higher income tax rates will cripple them, Russia would still have the lowest personal income tax rate in Europe at 35 percent.
The excise tax in Russia explicitly covers imported luxury goods, including tobacco products, beer wine and spirits, cars and light truck, tires, jewelry, gemstones, rugs, crystal, fur, and leather products. The rate of excise tax ranges from 10 percent for crystal to 90 percent for grain alcohol personal. A new principle was applied, in accordance with a recent decree, to the calculations of excise taxes on alcohol and tobacco imports. In contrast to the previous practice where excise taxes were calculated in proportion to the customs value of the imported goods, under the new procedure, the taxes (on August 1, 1996) will be imposed in ECU per one unit of commodity item. In some ways, excise taxes and single-stage retail taxes would seem to be prime candidates for regional taxation in the Russia just as they are in market economies, especially if the taxing locality is large enough to avoid revenue loss from consumers crossing the border to regions with lower tax rates Such taxes thus seem more suitable for larger intermediate governments than for small local governments.
The profit tax calls for a 32 percent tax on all profits, with an exception for profits generated by retailers. Profits by retailers are taxed at a 45 percent rate. The tax discriminates against Russian workers because the tax is not applied to the wages of foreign workers. The profit tax keeps intact the profit reinvestment concept of prior Soviet tax legislation. Essentially, no tax is imposed on profits reinvested in the business venture. Also, the government has not changed the 15 percent withholding rate for interest, dividends, and other passive income. A 20 percent withholding rate applies to royalties on copyrights and licenses.
A VAT of 28 percent passed into a law on December 6, 1991 and became effective on January 1, 1992. The VAT was not initially imposed on imports or exports. However, the government changed the policy very soon afterwards. For instance Russian neighbor, Ukraine will be happy to realize that Russia imposed a VAT on imported goods originating from Ukraine (Decree No 1216 of August 18, 1996). The reason for the decree is to preserve stability of the Russian commodity market. The decree also takes into account that Ukraine is not a part to an agreement signed by the member states of the Commonwealth of Independent states on the coordination of tax policy. The general VAT rate as of January 12, 1996, remains at 20 percent. A rate of 10 percent applies to certain food items and children's goods. Payment of the profits tax and VAT of state owned enterprises is centralized at the level of their ministries administrative departments (Decision No 629 of May 22, 1996).
The corporate income tax has three tax rates and the application is based on the type of income earned. Manufacturing income is taxed at 18 percent, service income at 25 percent, and income earned by retailers at 45 percent. One of the most interesting things is that the revenue is not intended to go to the central government. Moreover, the law is written that regional authorities can tax corporate profits up to 18 percent, 25 percent, and 45 percent.
The sales tax was first introduced on December 29, 1990 by USSR Cabinet of Ministers. It was decided to approve a list of goods and services whose sale on USSR territory will not incur the 5 percent sales tax. The local and regional authorities may make additions to list of goods in everyday demand and services to the population which are exempt from the sales tax (see the appendix). population.
Attorneys and tax specialists in Russia say the greatest problem facing enterprises is the lack of a satisfactory tax code. It is necessary that tax policy should be circumscribed and that more power should be given to the legislature. The nature of the tax structure allows some people to be heroes by breaking the rules. For example, a pharmaceutical company chief who had his security guard expel tax inspectors from his head quarters and vowed to shoot them if they returned, was elected to a seat in Parliament instead of going to jail. The penalties for non-payment of taxes is a defiency of the tax system that drives people from the tax system because they are so afraid of making a mistake that they prefer not to pay. For example, a standard 100 percent fine exists for understating income. The interest rate on late payments alone amounts to 0.7 percent a day, or 255 percent per annum, a penalty that can dwarf the actual liability. The penalty amount is presently reduced and is tied to the refinancing rate of the Bank of Russia. The penalty for each day of delinquent payments would equal 1/300 of the prime rate of the Central Russian Bank.
Russia also does not have a specialized tax court. To seek justice in tax issues, taxpayers have to find a people's court which is willing to accept the case. The courts do not have expertise in the area of tax law which is why most of the courts are reluctant to accept tax cases. The lack of legal recourse leads to corruption within the tax collection system. Russia does not have a law like the Freedom of Information Act (FOIA) or the Privacy Act which hinders the accountability of the tax service.
Aside from ample monetary reasons to evade and avoid taxes, taxes (in the Western sense) did not exist in Russia during the Soviet period and therefore the idea of a Western style taxation is unpalatable to many Russians. Taxes began to appear in the USSR only in 1991 which means that the current population has only had to deal with the issue of taxation over a short period of time. The result of this historical experience is that only between 60 and 75 percent of projected tax revenues have been collected this year.
Decree No 1212 of August 18, 1996 is designed to improve tax collection by preventing tax evasion and streamlining cash and non cash turnover. Among other measures, the decree orders enterprises in arrears of payments to the government to open settlement accounts in banks or credit institution within the Russian Federation. Those accounts are referred to as accounts of enterprise in arrears. When requested by the appropriate tax authorities, banks and other credit organizations are required to provide data about the transaction of enterprises holding these accounts. Taxation organ may refuse to register the account of an enterprise in arrears in case there are no funds available on the correspondent account of the bank or other credit organizations. An interesting aspect of this decree is that the government finally began to crack down on misrepresentation "in case of noncompliance with this requirement or intentional provision of false information in the notice submitted to taxation organ enterprise in arrears that had performed the transactions in question will be fined by the taxation organ in the amount of the transaction value". It has proposed to improve the tax system by scrutinizing financial transactions through banks. If an enterprise opens a bank account, the bank or other type of credit institution must immediately inform the tax organs about the accounts for tax purposes. Such tax policy will let the tax agencies observe tax payments more efficiently as everything will be recorded.
Presidential Decree No 1212 of August 18, 1996 also introduced policies concerning cases containing the circumstances stipulated in the Law of the Russian Federation on Insolvency (Bankruptcy) of Enterprises, the Federal Department on Insolvency (Bankruptcy) at the State Property Management Committee of the Russia Federation shall file with arbitration court request to institute proceedings on insolvency (bankruptcy) against enterprises that have repeatedly violated this Decree during one calendar year. As it was with collective farms and state farms, enterprises can just change their names and continue to evade taxes. An important issue related to insolvency is loss of massive amounts of jobs and what will workers and one enterprise" towns do for a living and revenue.
On the bases of the decree, the government has widened its crackdown on tax evaders--adding several leading oil companies to a list of tax delinquents that might be forced into bankruptcy court unless they pay their arrears. The move was the latest in a series of desperate measures the government is taking to boost tax collection and mend its thread bare budget. The government hopes that by threatening major tax evaders with bankruptcy, they will scare the country's errant tax payers into filling empty coffers. Major companies targeted for bankruptcy can avoid insolvency proceedings, if their accounts showed the government owes them an amounts equal to their tax debts for fuel supplied to state organizations.
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