Everything has Changed in Russian Taxation
Dec 03, 2001
Jon Hellevig, a 39-year-old Finnish tax lawyer and Managing Partner of Hellevig, Klein & Usov (www.hkupartners.com), is about to release a book revealing the ins and outs of the Russian tax system.
Titled "Russian Taxes," the book, written with business partner Sergei Kalinin, looks at how the new Russian Tax Code has done away with a complicated system standing in the way of investment.
Hellevig has worked in Russia for nine years. He is a partner with the Finnish-owned accounting firm Avenir & Partners in Moscow. The Russia Journal spoke to Hellevig about his new book and his views on Russia's changing tax system.
THE RUSSIA JOURNAL: One gets the impression that the Russian taxation system is contradictory, complicated and antiquated. Do you think anything has changed?JON HELLEVIG: I definitely think that everything has changed. Since 1999, tax reform has started at a rapid pace with adoption of the first part of the Tax Code, which spells out the general rights and obligations of the taxpayers and the taxation authorities. And in 2000, the first specific taxes were adopted under the new Tax Code: that was the value-added tax, the 13 percent personal income tax and the social tax with a regressive scale. And then finally this year the new profit tax law was adopted, coming into force on Jan. 1, 2002, revolutionizing taxation of business operations.
RJ: There is always a big difference between law and implementation. Can taxpayers and companies go to the courts to fight unfair treatment by the tax authorities?
JH: In fact, yes, the taxpayers can, and under the new Tax Code their rights and obligations are quite clearly spelt out, which provides for clear rules for the courts to follow. And practice has shown that in most cases the treatment has been fair.
RJ: What are the most significant changes to the Tax Code and how do they affect companies and individuals?
JH: Before the Tax Code there was no comprehensive system of adopting tax laws or rules; and because of that there mushroomed up numerous taxes on a federal level and on a regional level with no one controlling the process.
The laws were chaotic and, hence, a real impediment for investment. The changes, therefore, provided a clear set of rules on each level and make for a more transparent system that allows you, and companies too, to plan ahead.
RJ: There have been some draconian laws about foreigners working and living in Russia over the last few years, and many times Tax Police have even come knocking on the doors of luxury apartments. What is taxation for expatriates like now?
JH: Taxation of expatriates has generally moved in line with taxation of Russians. And the Tax Code in itself does not include material differences - although there are some technical issues dealing with the fact that the person is from a different country.
But also in practice, there are so many Russians who earn a good living that foreigners do not stick out so much in the crowd anymore, and that's why we don't see foreign individuals as special targets of the authorities. There is one very favorable provision and that is that under certain circumstances no social tax is levied on the salaries of foreigners.
RJ. How would you compare the new tax regime in Russia with that in other European countries?JH: Again, if we go to the material laws - and that is what is taxable and what is not taxable - we are on an average with all the other European countries. So, on an average Russia is fine. And when it comes to tax rates they are very favorable in Russia.
The big problem remaining is the extensive administrative burden due to the Russian bureaucracy. Although the rules as such have been made more liberal, companies and individuals still have to produce an abundance of documents to comply with the bureaucracy.
RJ: What exactly do you cover in your book? Is it only for tax lawyers?
JH: I cover the Russian taxation system in accordance with the Tax Code. That is, first, general rules for setting tax law, then, the rights and obligations that companies and individuals have to comply with and the actions they can expect from the authorities.
Then, all major taxation issues more in detail. And I would say that it is a book intended for anybody who has to take decisions where the tax laws are concerned. I think it's a book that a general manager could use, that a finance director or a human resources director could use.
But I think a tax lawyer could also use it for him to more quickly orient himself to the right question. In fact, when I worked on the draft, I also had client questions on the tax law, and I looked where to find the answers and I went to the draft of my book and found the answers.
RJ: How would you compare the Russian business environment after all these laws have been passed compared to, say, 1998? Have things really changed?
JH: Well, this is a question that I often put to myself. 1992 has a special meaning for me because that's when I came to Russia. I thought everything was so strange and incomprehensible.
And today everything seems so clear and I don't really know if this shows how much I've been Russified or if the laws, the environment, have in fact been changed toward the Western direction.
The thing is that I feel that Russia has a fairly transparent taxation system, the corporate laws are generally clear, although problems of course remain.
And today you find in Russia a big amount of business leaders who want to play by the rules and a huge amount of human resources to join. And the big obstacle that remains is the bureaucratic burden on all levels of life.
Titled "Russian Taxes," the book, written with business partner Sergei Kalinin, looks at how the new Russian Tax Code has done away with a complicated system standing in the way of investment.
Hellevig has worked in Russia for nine years. He is a partner with the Finnish-owned accounting firm Avenir & Partners in Moscow. The Russia Journal spoke to Hellevig about his new book and his views on Russia's changing tax system.
THE RUSSIA JOURNAL: One gets the impression that the Russian taxation system is contradictory, complicated and antiquated. Do you think anything has changed?JON HELLEVIG: I definitely think that everything has changed. Since 1999, tax reform has started at a rapid pace with adoption of the first part of the Tax Code, which spells out the general rights and obligations of the taxpayers and the taxation authorities. And in 2000, the first specific taxes were adopted under the new Tax Code: that was the value-added tax, the 13 percent personal income tax and the social tax with a regressive scale. And then finally this year the new profit tax law was adopted, coming into force on Jan. 1, 2002, revolutionizing taxation of business operations.
RJ: There is always a big difference between law and implementation. Can taxpayers and companies go to the courts to fight unfair treatment by the tax authorities?
JH: In fact, yes, the taxpayers can, and under the new Tax Code their rights and obligations are quite clearly spelt out, which provides for clear rules for the courts to follow. And practice has shown that in most cases the treatment has been fair.
RJ: What are the most significant changes to the Tax Code and how do they affect companies and individuals?
JH: Before the Tax Code there was no comprehensive system of adopting tax laws or rules; and because of that there mushroomed up numerous taxes on a federal level and on a regional level with no one controlling the process.
The laws were chaotic and, hence, a real impediment for investment. The changes, therefore, provided a clear set of rules on each level and make for a more transparent system that allows you, and companies too, to plan ahead.
RJ: There have been some draconian laws about foreigners working and living in Russia over the last few years, and many times Tax Police have even come knocking on the doors of luxury apartments. What is taxation for expatriates like now?
JH: Taxation of expatriates has generally moved in line with taxation of Russians. And the Tax Code in itself does not include material differences - although there are some technical issues dealing with the fact that the person is from a different country.
But also in practice, there are so many Russians who earn a good living that foreigners do not stick out so much in the crowd anymore, and that's why we don't see foreign individuals as special targets of the authorities. There is one very favorable provision and that is that under certain circumstances no social tax is levied on the salaries of foreigners.
RJ. How would you compare the new tax regime in Russia with that in other European countries?JH: Again, if we go to the material laws - and that is what is taxable and what is not taxable - we are on an average with all the other European countries. So, on an average Russia is fine. And when it comes to tax rates they are very favorable in Russia.
The big problem remaining is the extensive administrative burden due to the Russian bureaucracy. Although the rules as such have been made more liberal, companies and individuals still have to produce an abundance of documents to comply with the bureaucracy.
RJ: What exactly do you cover in your book? Is it only for tax lawyers?
JH: I cover the Russian taxation system in accordance with the Tax Code. That is, first, general rules for setting tax law, then, the rights and obligations that companies and individuals have to comply with and the actions they can expect from the authorities.
Then, all major taxation issues more in detail. And I would say that it is a book intended for anybody who has to take decisions where the tax laws are concerned. I think it's a book that a general manager could use, that a finance director or a human resources director could use.
But I think a tax lawyer could also use it for him to more quickly orient himself to the right question. In fact, when I worked on the draft, I also had client questions on the tax law, and I looked where to find the answers and I went to the draft of my book and found the answers.
RJ: How would you compare the Russian business environment after all these laws have been passed compared to, say, 1998? Have things really changed?
JH: Well, this is a question that I often put to myself. 1992 has a special meaning for me because that's when I came to Russia. I thought everything was so strange and incomprehensible.
And today everything seems so clear and I don't really know if this shows how much I've been Russified or if the laws, the environment, have in fact been changed toward the Western direction.
The thing is that I feel that Russia has a fairly transparent taxation system, the corporate laws are generally clear, although problems of course remain.
And today you find in Russia a big amount of business leaders who want to play by the rules and a huge amount of human resources to join. And the big obstacle that remains is the bureaucratic burden on all levels of life.