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Russia: No Tax Man Ever Had It Tougher


International Business: RUSSIA

RUSSIA: NO TAX MAN EVER HAD IT TOUGHER

Boris Fyodorov undertakes a crucial crackdown on cheats

Boris G. Fyodorov, 40, was recently appointed to one of the toughest jobs in Russia. The new director of the State Tax Service must find ways to improve Russia's chronically poor tax collection record. Only 5 million out of 150 million citizens hand in tax returns. Companies regularly stash their income overseas. And industrial groups favored by the government have been allowed to ignore taxes with impunity.

Fixing Russia's tax system is key to stabilizing the country's precarious finances--and persuading both international investors and the International Monetary Fund to pump more money into the economy. Without a financial package to shore up its dwindling hard currency reserves, Russia may be forced to devalue its ruble, striking a serious blow to its reform process. On June 23, Russian Prime Minister Sergei Kiriyenko and President Boris N. Yeltsin asked the Duma to approve an anticrisis package of tax and spending cuts, aimed partly at meeting IMF demands for radical action.

Fyodorov, a straight-talking banker and former Finance Minister who helped fight Russian inflation by slashing industrial subsidies a few years ago, is also moving quickly to crack down on tax delinquents. He is denying oil companies that do not pay their tax bills access to export pipelines. He is creating a database of the country's 1,000 richest citizens and checking up on their tax payment records. And to show he means business, on June 20, Fyodorov toured Moscow markets and gas stations to check how many were providing receipts, a sign that they record sales and pay taxes. None were. Now he has launched a massive campaign to ensure merchants use cash registers.

It's a good start. But Fyodorov, like his predecessors, will have a hard time succeeding.By Patricia Kranz in MoscowReturn to top

A TALK WITH BORIS FYODOROV

Russian tax czar Boris G. Fyodorov discussed his challenge with BUSINESS WEEK Moscow Bureau Chief Patricia KranzQ: What should be done to improve Russia's tax collection rate?A: I propose that we have one personal income tax rate--20% [rather than the current graduated rates of 12% to 35%]--but levy it on everything that people get in money form. This would increase the amount of taxes collected twofold or threefold. We should go for a sales tax and hit taxpayers directly at the point of consumption. We should simplify the tax system and make it more transparent and easier to collect. Such things as the [35%] profit tax on corporations--we can cut that in half. There's very little money coming from there, and nobody is paying.Q: What has changed since you took over the State Tax Service on May 30?A: It is clear that in certain government bodies there wasn't the will to go against certain companies, such as Gazprom. Today, nobody can say that the State Tax Service doesn't avail itself of the authority given to us. All over the country, we have started trying to take over the accounts and property [of tax delinquents] and, sometimes, the debts owed to them. This process raises a lot of noise and hatred. But this will help [newly appointed financial envoy Anatoly B.] Chubais in his negotiations with the International Monetary Fund.Q: The government has promised many times in the past to collect more taxes, but failed.A: The government shouldn't be one big tax police force. The question is whether Russia's fiscal or economic policy is right. The federal government doesn't get revenue from citizens because [any income tax they pay] goes to local authorities, and most citizens don't pay taxes. There are, for example, some 100,000 foreigners in Moscow. But how much is paid in taxes? Peanuts.Q: Have Russia's "oligarchs"--the business elite--been paying taxes?A: Most of the oligarchs have declared incomes in excess of $1 million. I don't know whether that's high enough. We will know in the future. And [they] paid taxes on it, which is good. These guys are more interested in creating a "normal" situation than those who don't have money. As in the U.S., those with incomes of $500,000 or more have higher compliance rates than those making less than $50,000. Hopefully, we will see the same in Russia, at least with the oligarchs.Q: How much did you pay in personal income tax last year?A: In 1997, I was a deputy of parliament and got a small salary. I have declared it. [Now,] my salary as a Russian minister is 6,000 rubles, or $1,000, per month. You've heard the expression, "It's O.K. to talk about lovers, but not money..." I won't say.Q: What will be the repercussions if the Russian government doesn't solve its fiscal problems?A: If we don't, we will get into a very bad situation where revenues won't be collected at rates high enough to pay for government programs. It will be very, very dangerous. One has to take action.Return to top


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