Business problems: a western view

Kevin Crawford
Business Development Manager (FSU), Rothmans of Pall Mall (International) Ltd

Legal framework

The legal framework governing commerce and investment in Russia is complex. There is a plethora of laws, regulations, decrees and instructions issued by numerous regulatory bodies, including the Duma (Parliament), the President, customs authorities and local government, whilst there is a Civil Code which is supposed to regulate these.

However, many of these rules are contradictory, both within and among themselves, and are issued without sufficient guidance given to the bodies which are supposed to monitor them. These bodies in turn often ignore or fail to understand the aim and detail of the legislation.

For example, while local and western lawyers tell you that the law on Value-Added Tax (VAT) exempts investors from VAT on contributions in kind to share capital, several companies have found that local customs posts tasked with implementing the exemption law disagreed with either the interpretation, or the law itself. This hampers investment since companies are understandably unwilling to pay a tax for which they believe they are not liable; paying could in addition set a precedent from which they might find it difficult to escape.

There is therefore an obvious need for legislators to issue clear, unambiguous laws whose authority is not in doubt and whose implementation is unequivocal to everybody who relies on it.

Fiscal framework

The same goes for Russia's tax regime. There are more than 100 taxes enacted by federal, regional and local bodies. These taxes are levied on, among other things, turnover (both net and gross), profits, fixed assets, net assets and a multiple of minimum wages. This proves to be not only a drain on cash - because the tax rate is effectively very high - but also an administrative burden: your finance staff end up spending most of their time on tax compliance rather than on producing management information to enhance the commercial operations of the business.

Furthermore, the allowability of some costs against profit still harks back to the command economy days. For example, advertising costs, vital in a free-market economy, are effectively disallowed.

There is therefore an immediate need to rationalise the number of taxes and to reduce the number of bases on which they are levied. In addition, the reporting deadlines (for example, most companies have to make three VAT returns a month) should be thoroughly reviewed to enable the efficient use of resources. At the same time, the current statutory accounts, which are used for tax reporting, need to be revamped so that they provide more meaningful financial information.

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