SOVIET TAXES ADD TO UNCERTAINTY

It sounds so familiar. A once reluctant government begins to make business opportunities in its country available to foreign capital. International companies like what they see and announce investment plans. Seduced by a good deal, the government raises taxes. Suddenly, there's no deal at all. Things haven't reached that sad extreme in the Soviet Union. Rough indications are that they will not. But no one can be certain. For companies venturing into the U.S.S.R., that's the

April 15, 1991

3 min read

Things haven't reached that sad extreme in the Soviet Union. Rough indications are that they will not. But no one can be certain. For companies venturing into the U.S.S.R., that's the biggest problem.

TAX LUST

Tax lust has smitten the U.S.S.R. The country's basic tax is a corporate income levy: 45% for Soviet entities and 30% for joint ventures with 30% or more non-Soviet participation. There's also a 15% tax on repatriation of profits.

Last year, Moscow decided also to tax profits above specified levels. The rate on state-only concerns is 100%. For joint ventures with non-Soviet participation it's 80-90%. Critical to the effect on non-Soviet joint venture partners will be how profits are calculated, which remains unclear. The Russian Federation also announced a levy on excess profits, slightly more lenient than Moscow's tax and no more clear.

Earlier this year, Moscow proclaimed yet another tax, this one on exports. The original rate on oil exports by Soviet entities, including joint ventures, was 40%, applicable this year only. More recently, without mentioning joint ventures, the government announced a temporary reduction of the export tax rate to 10%. It hasn't specified how the export tax relates to the levies on income and excess profits.

Soviet officials express surprise over the concern of non-Soviet companies to these tax initiatives and associated confusions. Their reaction is a measure of how much the Soviets and their current and prospective foreign partners have to learn from each other.

To the petroleum industry, capricious taxation is nothing new. Moscow's behavior differs only slightly from that of Jakarta or Lima or Washington, D.C., in times past. Governments in fiscal straits tend to raise taxes without considering the potential damage to economies and, therefore, ultimate state revenues. Sometimes companies can persuade governments to loosen the squeeze. Sometimes they take their money and know-how elsewhere. It all depends on how much profit they think they can earn and how much risk they must bear in one country in comparison with others.

At least Moscow has the excuse of inexperience. In the Soviet Union, profit until recently was-and in some quarters remains-an alien concept. Income and excess profit taxes apply to something no one can define. Companies must understand that about the Soviets. And the Soviets must understand how quickly investment capital can disappear when tax surprises and bureaucratic reversals add up to too much risk and too little hope for adequate returns.

HOPEFUL SIGNS

There are hopeful signs. Moscow did trim the export tax rate. Last year it authorized joint stock companies and took uncertain steps toward permitting 100% foreign ownership of Soviet concerns. It recently moved to make the ruble a viable international currency. In September it will hold its first all-competitive oil and gas lease sale, accepting bids for tracts in Turkmen Republic.

The Soviets are learning their way into the capitalist world. The question is whether they can clarify jurisdictions, streamline rules, and stabilize taxes before too many international investors write off Soviet business on grounds of chronic uncertainty. A confidence test will take place in September, when oil companies demonstrate what exploration rights are worth in Turkmen.