Outstanding issues
Beginning of counter-reform?


In the run-up to the presidential election of May 1996, President Boris Yeltsin signed Decree 685, which marked the beginning of a large-scale reform of the Russian tax system. The decree established the key goals of:

  • reducing the tax burden for business;
  • cutting the number of taxes - in the mid-1990s, Russia had around 100 taxes as a result of uncontrolled implementation at regional and local level; and
  • building a stable tax system that would remain unchanged for the duration of each financial year.

The reform was mostly implemented between 1998, when Part 1 of the Tax Code was passed, and 2008, which saw a cut in the profit tax rate to 20%.

Many aims of the reform have been achieved. Over the past 10 years Russia has seen fundamental changes in its tax system and administration. All taxpayers have benefited from the adoption of the liberal provisions of Part 1 of the code, as well as the codification of tax legislation, cuts in tax rates and a reduction in the number of taxes.

Outstanding issues

Despite the acknowledged advances, the fiscal reform project has failed in certain key areas. Part 1of the code has been amended 45 times and there have been no fewer than 216 amendments to Part 2. The intended stability of law seems as far away as ever.

The code was intended to ensure a uniform and consistent approach to tax matters, but it is not free of inconsistencies. For instance, Article 4 prohibits the tax authorities from issuing regulations, whereas numerous other articles allow them to do so.

The government pledged to cut down on concessions and exemptions from the general tax regime. There was a dramatic reduction in the number of concessions in 2001 and 2002, but the past five years have seen such special measures being allocated with abandon. In addition, legislation often disguises concessions by referring to them as 'deductions', 'exemptions' or 'specifics of taxation'.

The presidential decree heralded the development of tax federalism, but the similarity between the Russian tax system and that of a unitary state has become even more pronounced.

The reform planned to elevate the importance of environmental taxes, but no commentators at the time could have foreseen that on December 10 2002 the Constitutional Court would issue a ruling(1) which would end the system of mandatory environmental levies.

A tax amnesty was expected to be offered to legal entities in 1996. However, it was not until 2007 that an amnesty was granted, and then only to individuals.

The idea that a tax code could be used without reference to subordinate legislation has proved unrealistic. The code now contains 42 references to the government's regulations, not counting legislation created by the Ministry of Finance and the Federal Tax Service.

The seemingly liberal reform of legislation on the registration and liquidation of legal entities has given rise to a system of mutual security in tax law, whereby a purchaser becomes secondarily liable for the wrongdoing of its defunct supplier.

Strictly speaking, there are 13 taxes and four special tax regimes under the code. However, in reality a multitude of taxes and charges continue to operate as stealth taxes, taking the form of levies, contributions or other payments. Cynics might suggest that the authorities are now as good as taxpayers at devising schemes to sidestep the code's requirements.

Throughout the period of attempted reform the financial needs of the state and municipal authorities have grown, giving rise to a number of 'in-kind' charges. These include a 'build and transfer' obligation for the authorities' benefit in respect of civil engineering and social and utility infrastructure, as well as apartments in new residential properties. Such obligations fall under the definition of 'charges', given that their 'payment' (ie, performance) is one of the conditions of public authorities issuing construction permits or performing other legally significant actions.

By far the most notorious provision introduced by the decree relates to value-added tax invoices, which taxpayers, the tax authorities and the courts have been struggling to understand for many years. Until this issue is addressed and resolved, together with the others, the tax reform process will remain incomplete.

Beginning of counter-reform?

Taxes are on the rise. In addition to higher rates of insurance contribution, land taxes have risen because of growing cadastral value. Mineral extraction tax and excise duties are also increasing.

New tax legislation has been enacted in the final days of the year. On December 30 and 31 2010 four tax laws were published in the Official Gazette; some entered into force on the day of publication or on January 1 2011.

No less worryingly, the notion of 'taxes' in Russian law is becoming vague because taxes are becoming decodified. For instance, customs duty was taken outside the scope of the code in 2004, although it was and continues to be a charge, as it meets the criteria in Article 8(2). In 2010 the unified social tax was redesignated as an 'insurance contribution', as it had been before 2001, but this did not change its fiscal nature. Apart from its direct and indirect economic impact, the removal of unified social tax from the scope of the code has led to a decline in the quality of regulation. For example, the Social Contributions Law contains no provisions relating to the principles of taxation or the periods during which the law has effect. Moreover, commentators have noted a gradual deterioration of legislation as compared to the code, the first part of which is regularly updated, and a failure to ensure consistency in administrative and judicial practices. The absence of criminal liability for evasion is also a problem.

Some new fiscal measures have taken the form of stealth taxes. The key elements of such taxes are established in subordinate regulations, which violate the separation of powers and undermine the fundamental principles of parliamentary rule. For example, in 2010 a tax on the copying of audio and video files was introduced to finance compensation for the authors of audio and video works.(2) The tax is paid by manufacturers and importers of certain equipment and media (eg, laptops, telephones, portable media players, compact discs) in the amount of 1% of sales revenue or customs value. Members of the State Duma have proposed a draft law which would impose a similar levy on telecommunications operators at a rate of 2% of sales revenue. A toll on heavy motor vehicles has been introduced in connection with the re-establishment of road network funds. There are discussions about the introduction of contributions towards the improvement of public utilities, a distribution levy for cinemas and contributions to a mutual assistance fund for airlines. All such levies share the characteristic features of taxes and charges, although many are not remitted to the state budget and are controlled by authorised organisations, rather than by the tax authorities.

In addition to its tax bill, a company may find itself facing contributions for the mandatory insurance of hazardous facilities (from 2012), mandatory payments for the installation of security fittings at the entrance of its buildings and many other 'offers you cannot refuse', not to mention illicit charges in the forms of bribes and kickbacks. It is little wonder that the real financial burden on business bears little resemblance to the picture painted by official propaganda.


The situation for taxpayers has been described as the "last days of a tax romance". The trend towards reform was reversed even before it was completed: a little peripheral tinkering with the legislation cannot reverse its general course. The result is the hidden growth of the tax burden in Russia and increased uncertainty for business and investment planning. Business is becoming less protected and appears ever less attractive as a result.

For further information on this topic please contact Vadim Zaripov at Pepeliaev Group by telephone (+7 495 967 0007), fax (+7 495 967 0008) or email ([email protected]).


(1) Ruling 284-О.

(2) Resolution 829, October 14 2010.