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Deficit to heavy companies through taxes

Like many other governments around the world, Russia's is taking steps to reduce its budget deficit. But it's steering clear of unpopular austerity measures. Instead, taxes are to be raised, particularly on business.

Taxes in Russia are going up from the beginning of 2011. The increase will be the equivalent of 2% of GDP to reduce the budget deficit which is expected to be a little below 5%. But Finance Minister Alexei Kudrin says these will not be temporary measures.

There is a difficult period ahead and there will be new trend for taxes, which will not be temporary, taxes are going to increase. Many countries have accepted such measures. But priority should first be given to ending tax breaks and creating neutrality in the tax system which applies equally to all companies.”

The measure which has caused the most concern among lawmakers is the decision to increase insurance payments for companies to 34% from 14%. Although this will have little impact on non-resident companies operating in Russia, according to Pyotr Medvedev, Head of Tax and Legal Practice in the CIS for Ernst & Young.

The increased insurance premiums on payroll funds will apply to the first 415,000 roubles. Average salaries that foreign companies pay are higher than this threshold. So for Russian business the rate for them would be exactly 34%, which is a dramatic increase compared to what they are paying today. For non-residents and for the companies that trade with Russia rather than operate in a country, it’s completely irrelevant.”

There are fears the cancellation of tax breaks would be a deterrent to those wishing to invest in Russia. But the head of Medvedev says that's unlikely.

We as a country will not be able to attract investors by simply reducing taxes, even by abolishing taxes completely. You really need to create the stimulus outside of tax area that would incentivize them to invest in Russia.”

The Finance Ministry is trying to have its cake and eat it by reducing the budget deficit while not “scaring” business. And for the most part, the experts believe that will be possible as even after the tax hikes the government will still be taking a smaller slice than in almost any other developed country.