ANOTHER SOVIET TAX LAW CHANGE

Soviet tax laws have changed again. Non-Soviet companies must wrestle with new uncertainties as they assess investments and plan operations in the U.S.S.R. The change, however, might improve the business climate. The Soviet council of ministers ended the corporate income tax replacing it with a 10% tax on the gross value of goods sold and leaving income taxation authority exclusively in the hands of republics. It also replaced turnover and sales levies with a value added tax with rates to be

Aug. 19, 1991

3 min read

The Soviet council of ministers ended the corporate income tax replacing it with a 10% tax on the gross value of goods sold and leaving income taxation authority exclusively in the hands of republics. It also replaced turnover and sales levies with a value added tax with rates to be set by republics. And it replaced the import-export tax with customs duties of unspecified rates.

ALWAYS QUESTIONS

As always in the rapidly changing Soviet Union, there are major questions. How will the government determine values of goods? How will services be affected? Must the council of ministers action be ratified by the Supreme Soviet? Will republics demand that they be the only authority for taxation of all types? How will republics deal with fundamental questions such as income definitions, rates, and income that straddles jurisdictions?

Until questions like these have answers, companies can't assess financial effects of the change and therefore can't fully appraise investment opportunities. Uncertainty remains a troubling mainstay of Soviet commerce. The tax move may nevertheless help business in other ways.

In relinquishing key taxation authority, Moscow has acted on the intention it proclaimed last June, in a draft union treaty with nine republics, to move away from central government planning. Each step in that direction improves Soviet economic prospects. And formal devolution of authority to the republics eases the U.S.S.R.'s chronic jurisdictional confusions.

The tax move improves the business climate, too, by scrapping a cumbersome union level scheme that was certain to discourage investment. Early this year, Moscow drew protests from international companies when it imposed a 40% export tax later reduced to 10%. Officials responded to the protests by noting that effective rates for export and income taxes were much lower than nominal rates because of rules providing for taxpayer arbitrage of ruble exchange rates. Export and income taxes, denominated in rubles at the official exchange rate, could be paid in rubles purchased cheaply at market rates. The aim was to encourage exporter sales of hard currencies inside the U.S.S.R. The effect, however, was to compound the currency exchange risks of Soviet investments.

ERRORS AND RISKS

Whether for political or economic reasons or both, the Soviets have again shown that they can recognize problems and make changes where necessary. That's crucial. Soviet leaders are overhauling discredited political and economic systems. False starts and errors, frustrating as they are for companies anxious to do business, are inevitable, Uncertainties and risks, political as well as economic, remain. Internal political pressures still can boil over into private deals, as they apparently have in the controversy surrounding Chevron Corp.'s efforts to include supergiant Tengiz oil field in its Caspian Sea joint venture.

On balance, however, the Soviet business climate is better now than it was a year, even 6 months ago. Tax and legal structures are taking shape-fitfully, at times. Soviet leaders, however much they still don't know about capitalist business, apparently know this about capital: To attract it, they must participate in an international competition that's destined to intensify. They also seem to recognize the perils of failure, which may explain their determination to adjust the system until they get it right.