Wednesday, June 23, 2010

Economics 23/06/2010: Russia scraps CGT

While neo-liberal and free-market Ireland is scrambling to find any new forms of tax to raise against its rapidly depleting household incomes and savings, Russia - an economy also badly impacted by the current crisis - is planning some real reforms.

Speaking at St Petersburg Economic Forum - annual leadership summit held in the Northern Russian city every year in June - Russian President Dmitri Medvedev said that his Government will abolish the capital gains tax on all long-term investments (including foreign direct investment). The measure is seen as a stimulus for non-oil and gas related investment in new technologies, manufacturing and services - areas that Russian Government established as priority for development over the next 10 years.

Russia already sports a flat-rate 13% income tax and a corporate tax of 20% (reduced by 4 percentage points in 2008 from 24%). Regional governments can cut the corporation tax to 16% on their own authority. There is zero tax on royalties from patents, know how and other forms of IP for domestic receipts and a 20% tax on payments from abroad - except where specified otherwise by bilateral treaties. Companies also enjoy an unlimited carry forward on losses.

The Government will also reduce its enterprise holdings by 80% to allow private (domestic and foreign) ownership of many 'strategic' national enterprises currently numbering around 200. "I am cutting the number of strategic companies five times...I have signed a decree to this effect today," Medvedev said.

Russian economy grew by 4% in 5 months between January and end of May 2010 and Medvedev also opened the door for future tax cuts on businesses, but this will be subject to continued economic growth and, presumably, continued displacement of extraction industries at the top of growth pyramid by other sectors.

"We shall return to the issue of a tax burden easening for businesses in the next few years if the global and Russian economies recover in favorable conditions. If everything goes to a favorable scheme," Medvedev said. Before then, there is a need to strengthen country fiscal position which means that some privatizations of the companies previously off the private investors' radar due to state restrictions will be forthcoming.

Medvedev also proposed the government will set up a joint investment fund with state and private investors to develop strategic projects. "...where state money will be augmented with private capital - say, we expect one ruble of state investment to attract three rubles of private investment. I think the idea should be implemented within a year," Medvedev said.


Anonymous said...

This is good news for Russia.

Once corruption perception is decreased FDI will surely follow.

TrueEconomics said...

Absolutely true. You are correct - it is a problem, both in real terms and perception terms. Medvedev had little to say on the issue at the Forum, but he did stress that the Government is still on track with anti-corruption agenda. Russian Government, since 2000, has been active in trying to reform laws, systems and personnel in power ministries, police, judiciary. Some reforms - e.g. enforcement of judgments - had some successes already. Reform of the military is ongoing and is relatively productive. Reforms in security ministries has been tougher. It is a mixed picture, but remember, the country was virtually on its knees when Putin came to power, with vast unpaid wages bills in public sector and virtually no rule of law. It is a very different landscape now, visible - positively - in the streets and business.

So improvements are taking place. They are hard and slow.

Anonymous said...

From the perspective of someone on the outside looking in, Medvedev seems to be on the right track with the announced economic & anti-corruption reforms, and there is no doubt Russia has come a long way since 2000.

In terms of perception, Russia has has a massive amount of work to do to gain trust from investors.

Just looking at the media, there really is a lot of negative stories about doing business in Russia.

Bill Browder from Hermitage Capital Management is a very vocal critic against doing business in Russia.

Also there were many stories regarding the difficulties Ikea had in Russia dealing with Local authorities and utility companies.

(There's 2 sides to every story, I would be interested to hear the Russian perspective on these.)

Once Russia gets to the point where they can address their critics in an open and meaningful way investment will begin to flow into country.