RUSSIA VOWS TO END OIL EXPORT TAX

Russia will eliminate its oil export tax by 1994 and until then will allow some exemptions, Russian officials have assured a group of U.S. tax specialists.

"They stopped short of saying it would be repealed by the end of the year," said Ken Crawford, a member of a Tax Foundation delegation visiting Russia and managing partner of KPMG Peat Marwick's Moscow office.

"But they did say it exists because of the temporary difference between internal and external prices and in the long run will go away."

Crawford said Russian officials with whom U.S. tax delegates met acknowledged that the export tax is a major factor discouraging investment in Russia.

"I got the clear reading that every foreign oil company operating in Russia ought to try to get the same treatment as Conoco and Gulf Canada, who were able to negotiate exemptions from that tax" he said. "Any who aren't trying now should ask for it."

The export tax was one of several tax related Russian economic issues on which the U.S. experts and Russian officials exchanged views early this month. The 15 member delegation was in Moscow on invitation from Russia's Ministry of Finance and State Committee on Taxation to help develop guidelines for laws governing Russia's taxation of foreign investment.

The U.S. group was sponsored by the Tax Foundation, Washington, D.C., a nonprofit, nonpartisan tax and fiscal policy research and public education group.

Russian officials who took part in meetings with Tax Foundation delegates represented Prime Minister Yegor Gaidar, Vice President A.V. Rutskoy, and members of the Supreme Soviet of Russia, Revenue Service of Russia, state committees for management of state property and foreign investments, and ministries of economics and finance.

TAXATION PRINCIPLES

In meetings with Russian officials, U.S. representatives outlined long term goals appropriate for a market economy tax system that encourages investment, aspects of existing Russian taxes of concern to foreign investors, and policies to encourage foreign investment while Russia's tax system evolves to one suitable for the long term.

The Tax Foundation said Russian tax law should be consistent with established foundation principles, including stability, reliability, simplicity, clarity, economic neutrality, open discussions of policy, free and fair taxation of international transactions, moderate tax rates, and applying tax principles to subnational as well as national governments.

As an interim policy to encourage foreign investment while a permanent tax system is developed, the delegation suggested:

One Russian agency should be responsible for seeking views of and circulating drafts to foreign investors as new legislative proposals are developed. Adequate time should be allowed for translations, analyses, and submissions of comments.
Investors should be able to obtain legally binding rulings interpreting laws, especially to reduce uncertainty in the next few years when investment is needed badly and the risk is high that legislation will be unclear.
Russia should put in place a procedure to provide investors with guarantees that tax rules, including maximum rates, will apply for specified periods of time.
Rulings and guarantees suggested should treat similarly situated tax payers in a similar manner, be published promptly, and have general applicability.

IMMEDIATE CONCERN

Crawford said Russian leaders hope to restore faith in the Commonwealth of Independent States tax system by reducing direct tax rates and raising more revenue from indirect taxes.

"They have come to realize that high tax rates are disincentives not only for foreign investors but for Russian entrepreneurs, and they are trying to create a tax and other legal structure that apply generally to foreigners as well as domestic tax payers," he said.

Among 14 areas of immediate concern to foreign investors, the Tax Foundation made recommendations about these Russian tax issues:

High tax rates--The tax rate of 60% applied to individual income is too high. Effective tax rates paid by enterprises, including the effect of disallowing deduction of labor payments more than four times the minimum wage, increase to about 73%. The effect on taxable profits of low depreciation rates and failure to account for inflation also should be considered.
Export taxes--Export taxes discourage exports and should be eliminated because Russia needs exports to attract foreign capital and technology. Because prices on world markets of most goods and services are beyond the control of one country, export taxes reduce net selling prices and exporters' profits.
Mandatory conversion of hard currency earnings--Forced currency conversion resembles a discriminatory tax on exports and other hard currency earnings of foreign investors. It essentially is an involuntary loan made in currency other than that in which the foreign investor calculates and reports profits.
Value added tax (VAT)--Russia should follow standard international practice by levying a consumption based VAT. By allowing businesses to offset taxes paid on purchases, including taxes on capital goods such as machinery and equipment, against tax due on sales the aggregate VAT base essentially is limited to the value of final products sold to consumers.
Capital recovery--It is appropriate to allow investors to recover the cost of capital investments by deducting depreciation of tangible assets and amortization of intangible assets.
Loss carryforward--To avoid disincentives for investment, losses incurred in one year should be allowed to offset income earned in subsequent years.

PACE OF REFORM

Crawford said power struggles among Russian ministries and agencies are slowing the pace of economic reform, and there is not much time left for Russian leaders to stimulate the economy with large infusions of foreign investment.

If Yeltsin remains in power without significant delay of economic reform, by 1993 many of the issues discouraging foreign investors could be solved and Russia's economic strength could make it less receptive to joint ventures involving foreign partners or foreign capital.

"The time to invest in business deals in Russia is from now and 3 years forward," Crawford said. "The opportunity to set up equity oil and gas deals might be less than 3 years."

Meantime, he said, Russian political leaders are willing to discuss the overall economic program with foreign oil companies prepared to make large investments in Russia "and try to build into prospective deals tax rates and other government takes that attract western capital."

Crawford said members of Gaidar's reform team expect the Supreme Soviet to pass tax holiday legislation by fall assuring that terms of registered deals will be honored if they were in place before the law was changed.

Action Russian officials promised this year on other tax laws inhibiting investment included:

Lowering the individual income tax rate to 30% from 60%, perhaps as early as the first of 1993.
Reducing the general VAT rate to 14% from 28% and to 7% on food.
Allowing an exemption to foreign companies on forced currency exchange.