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Moscow: Small Businesses Lost In Tax Labyrinth


Relations between the tax authorities and businessmen are put to the test once again with a series of new, ambiguous bills. State financial controllers insist that "tax rates are the lowest in Europe,” while entrepreneurs complain of the “endless and confused tax reforms.”

Today tax changes are occurring in the complicated conditions of the economic crisis. The government is in dire need of money for social programs, while businesses are seeing fewer customers in need of their goods and services. Under such conditions, any tax changes need to be well-thought-out.

In 2008, small businesses were given a break when the government initiated a series of anti-crisis tax measures. The Duma passed legislation to lower the tax burdens on businesses in order to make up for at least part of crisis-related losses. For instance, the profit tax was decreased from 24 to 20 percent. The investment premiums on profit tax were also increased to 30 percent for certain types of property. Small companies were given the opportunity to defer VAT payments. Finally, the Duma increased the threshold for using the simplified taxation system to 60 million rubles and relinquished small business from the need to use cash registers. However, this law left out half of all small businesses – those selling alcohol products, and even those who were, according to the law, freed of the requirement, were still unsure that they would not be prosecuted under other legislation if they did not produce cash register receipts for all their transactions with customers.

Considering the growing deficit in the budget, new tax breaks are unlikely. There are many problems with Russia’s modern tax system. However, the main problem is not in the rates: in comparison with the rates in other analogous countries, they are competitive. In fact, rates are higher in Europe. The problem is that the system is so massive and confusing that neither the taxpayers nor the tax authorities understand it. Small businesses feel the brunt of it. It’s not surprising that in comparison with 2008, the share of entrepreneurs involved in innovation fell by 40 percent. They can’t survive under today’s fiscal pressure.

Tax lawyers think tax reforms should be aimed at reducing administrative costs for entrepreneurs. For example, in 2008 the decision was made to allow enterprises to deduct VAT on advance payments. This is good on the surface, but administrative costs and risks turned out to be so high that many companies have requested to be exempt from this “privilege.” Lawyers question why such a privilege is necessary at all when advance payments could just be excluded from VAT in the first place.

“It was a matter of deciding to whom to give priority – to those who pay advances or those who receive them,” said one high-ranking MinFin official. “It was decided to ‘reward’ those who make the payments.” As a result, administrative costs increased for everyone involved. If these defects were eliminated, everyone would experience alleviation, and the amount of people not paying taxes would decrease.

None of the tax inspectors seem to recall the 2006 law, “For Normalizing Relations Between Tax Collectors and Tax Payers.” As one lawyer believes, the tax authorities have failed to notice that they have new obligations and limitations. Tax inspections occur just as frequently as before. The most popular measure in the fight against taxpayers is still the harshest – seizing accounts. If this continues, the country may lose a significant portion of its taxpayers.

There have been many heated disputes between officials and businessmen regarding the collection of the imputed tax. It’s interesting entrepreneurs are divided on this issues. According to a survey, about half of respondents like this form of tax assessment, while the other half met the measure with raised fists since they became hostages of municipalities that arbitrarily manipulate the profit base coefficients. The same type of activity is taxed completely differently depending on the region. Widening the practice of patent taxation would help to lighten the stress.

Only 1000 patents are issued in the entire country. The Duma promises to review the patent legislation soon. On one hand, this will help resolve the problem of shady activities, thereby making life easier for the tax authorities, while on the other hand the patent system goes along well with a government support program for entrepreneurs. The Ministry of Economic Development believes that if a law were passed at least 1 million entrepreneurs would be able to work by patent.

The crisis forced the government to call on law enforcement agencies to assist with tax collection. “Unfortunately it’s necessary to note: if some kind of progress has been noticed in other spheres, in the tax sphere progress has yet to be seen. Because of the crisis the situation is getting worse. Signals are coming in from all corners of the country that law enforcement practice is drawing a lot of complaints,” said Sergey Borisov, head of a civil organization supporting the interests of small and mid-sized companies.

Sergey Shulgin, Deputy Head of the Federal Tax Service (FTS), refutes the popular belief that state financial controllers choke small businesses with inspections. According to him, tax authorities inspect less than 2 percent of all business entities a year, and the number of small enterprises among them is getting close to zero. He also cited the significant drop in the number of tax disputes: courts have noted a two-fold decrease.  The majority of these disputes are reviewed inside the tax bodies, allowing half of them to be resolved before court proceedings are begun.

Many have questioned the necessity of submitting tax declarations for income that is not subject to tax. “We’ve spoken to MinFin about this but nothing’s been achieved yet,” said Shulgin. “They answer that it is necessary in order to collect accurate statistics.”

A bill has just been introduced to the Duma that would significantly change the approach to criminal persecution of taxpayers. In essence, taxpayers would have more chances to try to prove their innocence or to pay their taxes before criminal proceedings are begun. In addition, the tax violations would need to be of a higher financial magnitude for criminal proceedings to be started. These provisions could be introduced as early as next year.

Another bill is related to the problem of VAT refunds, where the government would return funds within 15 days of receiving the declaration for a certain category of taxpayers, and then confirm the return was made according to law. This measure will only be extended to companies that have proven their tax discipline.

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