1. SUMMARY: ON JULY 26, 1995, MIKHAIL ZADORNOV, CHAIRMAN OF THE RUSSIAN DUMA COMMITTEE ON BUDGET, TAXES, BANKING AND FINANCE, ADDRESSED THE AMERICAN CHAMBER OF COMMERCE. ZADORNOV HIGHLIGHTED THE ACHIEVEMENTS OF THE DUMA TO DATE IN ENACTING LEGISLATION TO ESTABLISH A FRAMEWORK FOR INVESTMENT, FOCUSING IN PARTICULAR ON TAX LEGISLATION. END SUMMARY.
2. ZADORNOV NOTED THAT IN ORDER FOR RUSSIA TO ATTRACT INVESTMENT, BOTH FOREIGN AND DOMESTIC, FOUR CONDITIONS WOULD NEED TO BE IN PLACE: POLITICAL STABILITY; LEGISLATION WHICH SUPPORTS A MARKET ECONOMY; FAVORABLE MACROECONOMIC CONDITIONS, INCLUDING MONTHLY INFLATION LOWER THAN 3 PERCENT; AND ACTION BY THE GOVERNMENT TO FIGHT CRIME AND CORRUPTION IN THE ECONOMIC AND POLITICAL SPHERE. ZADORNOV EXPRESSED HIS VIEW THAT ALL FOUR CONDITIONS COULD BE IN PLACE BY MID 1996. HE NOTED THAT EVEN CHANGES IN THE PARLIAMENT AND PRESIDENCY AS A RESULT OF UPCOMING ELECTIONS WILL NOT ALTER THE REFORM-ORIENTED DIRECTION OF RUSSIA.
3. ZADORNOV HIGHLIGHTED THE EFFORTS HIS COMMITTEE HAS MADE OVER THE PAST 18 MONTHS TO ESTABLISH FAVORABLE CONDITIONS FOR INVESTMENT AND ECONOMIC GROWTH. ACCORDING TO ZADORNOV, THE KEY LEGISLATION WHICH HIS COMMITTEE HAS SPEARHEADED INCLUDES: A) THE CIVIL CODE, WHICH HAS CREATED THE BASIS FOR CONTRACTUAL RELATIONS; B) PRODUCTION SHARING LEGISLATION (STILL TO BE APPROVED BY THE FEDERATION COUNCIL, OR THE UPPER CHAMBER OF PARLIAMENT) WHICH REPRESENTS A MAJOR BREAKTHROUGH TOWARD HELPING THE RUSSIAN OIL AND GAS INDUSTRY; C) DRAFT LEGISLATION CURRENTLY BEING REVIEWED BY THE PRESIDENT ON EQUITY MARKETS; D) A PACKAGE OF BANKING LAWS ALSO CURRENTLY UNDER REVIEW BY THE PRESIDENT, WHICH WILL COMPLEMENT THE ALREADY- EXISTING LAW ON THE CENTRAL BANK; E) LAWS ON INSURANCE AND ACCOUNTING.
4. ZADORNOV NEXT TURNED HIS ATTENTION TO TAXATION LEGISLATION, NOTING THAT IT IS THE MAIN CONCERN OF INVESTORS IN RUSSIA. HE HIGHLIGHTED KEY PROVISIONS OF THE LAW ON THE FUNDAMENTALS OF THE TAXATION SYSTEM, WHICH WAS RECENTLY PASSED BY THE DUMA (SEE REF B). ACCORDING TO ZADORNOV, THE LAW CHANGES THE PATTERN OF RELATIONSHIPS BETWEEN THE TAXPAYER AND THE TAX AUTHORITIES. THE MAIN ELEMENT, ZADORNOV NOTED, IS A REDUCTION IN THE NUMBER OF FEDERAL TAXES FROM 25 TO ABOUT 12. TAXES TO BE ABOLISHED INCLUDE THE EXCESS WAGE TAX, THE SPECIAL TAX (BASICALLY A 1.5 PERCENT VALUE ADDED TAX), THE TRANSPORT TAX, THE TAX ON EQUITY OPERATIONS, THE ADVERTISING TAX, THE HOUSING TAX AND THE VEHICLE PURCHASE TAX, AMONG OTHERS. HE ADDED THAT WHILE THE CONSTITUTION PREVENTS THE DUMA FROM ABOLISHING REGIONAL AND LOCAL TAXES, UNDER THE LAW ON FUNDAMENTALS A CEILING ON THE RATE OF THESE TAXES WILL BE IN EFFECT AMOUNTING TO NO MORE THAN 2 PERCENT OF PAYROLL FUNDS FOR REGIONAL TAXES AND NO MORE THAN 5 PERCENT OF PAYROLL FUNDS FOR LOCAL TAXES.
5. THE LAW ON FUNDAMENTALS IS ALSO IMPORTANT, ZADORNOV NOTED, BECAUSE IT PROVIDES FOR STABILITY IN THE TAXATION SYSTEM. UNDER THE LAW NEW TAX LEGISLATION AND NEW TAX RATES CANNOT BE ENACTED IN THE MIDDLE OF THE FISCAL YEAR, BUT RATHER ONLY AT THE BEGINNING OF THE FISCAL YEAR IN CONJUNCTION WITH ADOPTION OF THE FEDERAL BUDGET. ZADORNOV STRESSED THAT THE DUMA IS TRYING TO GET RUSSIAN GOVERNMENT AGREEMENT THAT TAX RATES SHOULD BE FIXED FOR TWO TO THREE YEARS.
6. ZADORNOV ALSO DISCUSSED THE MECHANISMS FOR SANCTIONS UNDER THE LAW WHICH, HE NOTED, ARE MUCH MORE FAVORABLE FOR TAXPAYERS. TAXPAYERS CAN APPEAL JUDGEMENTS AGAINST THEM AND DO N OT HAVE TO PAY ANY BACK TAXES OR FINES UNTIL A REVIEW OF THE CASE HAS BEEN CONDUCTED. IN GENERAL THE LAW LOWERS FINES FOR NON-PAYMENT. ADDITIONALLY, TAX AUTHORITIES MUST PROVIDE CONSULTATIONS TO TAXPAYERS INCLUDING RESPONSES TO INQUIRES IN WRITING. TAX INSPECTIONS CANNOT LAST LONGER THAN THREE MONTHS. TAX INSTRUCTIONS ISSUED BY FEDERAL BODIES ARE NOT LEGALLY BINDING, THUS ENDING A SITUATION WHERE TAX REGULATIONS CONTRADICT THE LAW BUT MUST BE ABIDED BY. FINALLY, SALARIES OF TAX AUTHORITIES WILL NO LONGER BE RELATED TO THE AMOUNT OF TAX MONIES THEY COLLECT.
7. ZADORNOV NOTED THE MAJOR HURDLE TO PASSAGE OF THE LAW BY THE FEDERATION COUNCIL, WHICH IS COMPOSED OF REPRESENTATIVES OF REGIONS, IS THE PROVISION LIMITING THE RATE OF REGIONAL AND LOCAL TAXATION, BUT HE STRESSED HIS HOPE THAT A COMPROMISE COULD BE WORKED OUT. ASSUMING THE FEDERATION COUNCIL APPROVES THE LAW AND THE PRESIDENT SIGNS IT, THE LAW WILL COME INTO EFFECT ON JANUARY 1, 1996.
9. ZADORNOV ALSO OUTLINED OTHER PROPOSED TAX CHANGES THAT THE DUMA IS CONSIDERING. THE DUMA ALREADY PASSED IN A FIRST READING A LAW AMENDING THE VALUE ADDED TAX AND PROFITS TAX. THE MAIN PROVISIONS WOULD BE ELIMINATION OF THE VAT ON IMPORT OF EQUIPMENT REPRESENTING CAPITAL CONTRIBUTIONS TO INVESTMENTS AND VAT REIMBURSEMENT FOR EXPORTS.
10. NOTE: THE LAW ON FUNDAMENTALS OF THE TAXATION SYSTEM DOES REPRESENT A SIGNIFICANT STEP FORWARD TO RATIONALIZING THE RUSSIAN TAXATION SYSTEM. THE TRUE TEST OF ITS SIGNIFICANCE, HOWEVER, WILL BE IN THE ABILITY OF THE RUSSIAN GOVERNMENT TO FULLY IMPLEMENT IT.