Russian Economic Reform

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Gaidar Institute views on taxation

Published on June 11 2011
Posted by: jeff

So far the only document for Group 6 is from the Gaidar Institute for Economic Policy. The document is divided into four sections with recommendations for each of the sections. These are: taxation of natural resources sector to become based on world prices for such resources; increased progressiveness of taxation of income and property; improving the structural composition of the tax system and the share of tax on consumption; better tax policy (in areas such as concessions) and tax administration.   

Jeff says that ….

(The two most noteworthy issues covered in the Gaidar paper are the big ones of taxation of users of natural resources (also presently a very hot issue in Australia) and the more specific (very hot) Russian issue of its very high 34% “insurance levy” on wages. This levy operates in a similar way to a payroll tax, and President Medvedev has demanded that the rate be significantly reduced. However, Medvedev’s demand has been met with considerable resistance by the Finance Ministry which says that such a reduction would increase the deficit in the Pension Fund and the additional shortfall would need to be covered by additional Federal Budget transfers to the Pension Fund. The remainder of the Gaidar paper is quite conventional from a tax policy perspective.)

According to the Gaidar document, suggestions for better tax policy should be based on the following criteria: 

(1)   Taxation of natural resources sector to based on world prices for such resources.

One possibility is to progressively move to taxation of the whole natural resources sector (oil, gas, metals, chemical industry products) in a way that is similar to the present taxation of oil, which is partially based on world market prices. 

Export duties should be cancelled in the medium /long term as they are a significant subsidy to domestic consumers of raw materials and energy (because of the “rents” from the use of natural resources which are owned by the state, or society as a whole).

Because of the need to maintain the profitability of oil refining/processing, it would be reasonable to maintain a gradual approach to reform of the export duty on oil and oil products. As a first step, the duty on oil may be lowered to a level which will secure an acceptable level of efficiency in oil refining/processing, while cancelling the export duty on oil products. The second step (after completion of the basic modernization of the oil refining/processing industry) would be cancellation of the export duty on oil. Cancellation of the export duty needs to be coordinated with sufficient financing for modernization of oil refining/processing, and also tax measures to stimulate the introduction of more energy efficient technologies.

The “Mineral Resources Extraction Tax” (MRET) for oil must be increased by an amount corresponding to the lowering of the export duty on oil, and rate of excise on oil products must be increased in size to compensate for the removal of the export duty on oil products. The increased rate of MRET must take into account the extra revenues received by the oil and gas sector from the growth in internal prices. 

Simultaneously, the MRET should be reduced for particular regions where costs of deposit development are high. Further out, it would be reasonable to introduce a tax on excess/super profits received from these new oil fields.

The application of MRET to gas should be re-examined to establish a tax rate which depends on the price of gas in the (presently regulated) internal market, and also be differentiated to take into account conditions of extracting the gas.

Part of the increase in the tax burden on producers of energy may be implemented by introducing a tax on carbon. Such a tax must be established in such a way that its level corresponds to the size of the damage to the environment. It would appropriately be levied per ton of produced fuel, applied using a calculated ratio to the emission of CO2. It would be paid by organizations extracting and selling fossil fuel. Introduction of a tax on carbon would permit, amongst other things, lower export duties.

(2)   Increase the progressiveness of taxation of income and property.

The present flat rate personal income tax system (the rate is 13%) should be changed to a progressive system.

Property taxation should be reformed over the medium term, so that there is a single tax on real estate property. Real estate would be valued for tax purposes at market value, with the tax being progressive.

The united social tax/insurance levy on wages was increased on 1 January 2011 (to 34%), but will not secure long-term balance in the State Pension Fund. At the same time it has “sharply increased the tax burden and made tax administration more complex”. The levy has also become “more regressive” and this needs to be reversed.

Increasing the tax burden on labor goes against the world-wide tendency to decrease the burden on labor and capital and to increase it on consumers.

(3)   Strengthening the structural composition of the tax system, and increasing the share of tax on consumption.

Reasonable to keep the VAT rate at 18%, or even increase it to 20%, and reduce the size of the considerable VAT free list (eg financial and insurance services, cultural and artistic services, lotteries etc, non-commercial activities of non-commercial organizations). Some budget subsidies may need to be introduced to offset the impact of such changes on some low income groups.

At the same time, the administration of VAT reimbursements (when the applied rate should be zero) should be streamlined and simplified. 

International experience show that increasing taxes on consumers while also lowering it on labor and capital permits an increase in economic competitiveness. Apart from VAT, excise rates need to be indexed to take account of the real evolving (changing) economic situation, particularly conditions and buying capability of population.  

(4)    Healthier taxation system and improved taxation administration.   

It is reasonable to more strongly emphasis the principle of “wide taxation base – low taxation rate”.

Taxation concessions need proper analysis. Improvements are needed in the business taxation system in the area of necessary business expenses (in particular, R&D). Tax legislation should permit the possibility of transferring losses not only to the future, but to previous periods (for one year, but maybe up to three years), in order to promote acceptance of risk in the economy. At the same time, would be necessary to have restrictions on the calculation of losses when liquidating (reorganizing) or buying companies. There is an urgent need to improve taxation which is associated with the financial instrument operations. Development of financial markets and increasing use of various instruments (such as derivatives depository receipts) means that is urgent need to improve taxation which is associated with financial instrument operations.

Taxation administration needs to be strengthened. There is a fundamental need to prevent tax administration being used as an instrument of competitive and political pressure. In particular, there needs to be uniform interpretation of disputable questions of taxation legislation in the explanations of the Minister of Finance and the correspondence of the Federal Tax Service.