Russian Economic Reform

Past Articles on the work of each of the 21 Expert Groups can be accessed here:

Taxation !!!

Published on October 16 2011
Posted by: jeff

It seems that Russia is making some progress in administration of the tax laws, and in the legislation itself.

Refunds of VAT payments have been an area of great fraud, particularly by way of refund claims for non-existent goods, fiddling the amounts on invoices, and ephemeral businesses. Last week an official of the Federal Tax Service told radio station “Echo Moscow” that such fraudulent claims are being reduced by better administration by the Service. Most of the improvement has occured in Moscow where a change of leadership at the beginning of the year has delivered positive results.

The claims of better administration by the Tax Service were supported by the director of the legal department at “ТНК-ВР management”, the deputy chairman of the tax committee at the Russian Union of Industrialists and Entrepreneurs, and by officials at the Ministry of Finance.

Also last week, “Vedomosti” ran an article on possible future changes to the tax laws. It quoted a report prepared by the Ministry of Finance, the Ministry of Economic Development, and the Federal Tax Service. In 2010 total tax concessions amounted to 2.48 trillion rubles, or 5.53% of GDP, with “business getting 1.063 trillion in stimulatory tax concessions”.

The Government is clearly looking to reduce the concessions in order to boost tax revenues. Many of these concessions are subject to fraudulent abuse as well as not necessaraily being the best way to achieve social and economic goals. Expert Group 6 on Taxation Policy (see right hand column for reports) recommended a reduction in the considerable VAT free list (eg financial and insurance services, cultural and artistic services, lotteries etc, non-commercial activities of non-commercial organizations). The Group also suggested that some budget subsidies may need to be introduced to offset the impact of such changes on some low income groups.

It is always good when someone produces a table of data on such issues, which “Vedomosti” did in its on-line version. (Article is “Как сократить триллион” on 10 October.) The following table shows data for 2010, and it seems quite straightforward. Most note worthy is the size of the VAT concessions.

  2010 2010
  Receipts Concessions
Total 7662.9 2483.1
% of GDP 17.05% 5.53%
Tax on profits 1774.4 178.1
VAT 1384.2 1762.4
Tax on Extraction of Natural Resources 1401.6 176.1
Property Tax (organizations) 428.5 305.3
Property Tax (individuals) 16.9 12.1
Land Tax 118.2 44.3

 

But it was the date for some of the years before 2010 that was most striking. “Vedomosti” published the data in the table below, although in a different table format. The size of the VAT concessions in 2007 and 2009 is huge, as is the increase in VAT receipts in those years – so I suspected a relationship of some sort, possibly in the form of an accounting adjustment.

Year VAT Receipts (billons, rubles) VAT Concessions (billions, rubles) Total Tax Concessions as % of GDP Total Tax Receipts as % of GDP
2005 1046.6 1087.8 6.55% 21.41%
2006 951.4 1437.1 6.51% 20.19%
2007 1424.7 4157.1 13.72% 21.01%
2008 1038.7 1438.2 4.52% 19.08%
2009 1694.7 7117.7 19.78% 16.21%
2010 1384.2 1762.4 5.53% 17.05%

 

I made some attempt to verify the data. The only thing that I came up with was a 10 February, 2011 release on the Federal Tax Service internet site that suggested that in 2009 VAT receipts were actually 1207.2 billion rubles rather than the 1694.7 in the table. 

The Tax Service data for VAT receipts in 2008 and 2010 were the same as those in the “Vedomosti” table; and the Tax Service data on total tax receipts for the 2008-2010 period were also very close to that in the “Vedomosti” table.

So, the cause of the large size of the VAT concessions in 2007 and 2009, and in the tax receipts in those years, remains a mystery to me!

Possible reasons include timing issues (year to year accounting off-setting adjustments), the effects of the “Global Financial Crisis” in Russia, and oil prices – or a combination of some of these.

In the final analysis, the rises in both VAT receipts and VAT concessions in 2007, and again in 2009, might not matter that much. Total tax receipts as a percentage of GDP have shown much less volatility, albeit with a declining trend.

Still, I would feel better if I knew the answer to this mystery! One of the basic requirements of good economic policy, forecasting and commentary is to know the strengths and weaknesses of the economic data.