Russia's tax system has historically been confusing, inefficient, unwieldy, and overbearing. Businesses and individuals routinely fail to pay their taxes on time, if at all. The government's need for money to pay pensions and salaries fueled a proliferation of taxes, including a tax on people crossing Russia's borders, additional levies on freight, new transit fees, and a tax on yields from government securities. In 1996, 26 tax collectors were killed, six were kidnapped, and 41 had their homes burned down. In the first half of 1997, the government only collected 57% of its targeted tax revenues.
Since 1999, the tax system has been the focus of a major reform effort aimed at reducing tax loads, improving collection rates, and bringing the system in line with those of advanced, market economies. The new Tax Code cut the number of official taxes from over 200 to about 40, and sought to end many loopholes. Part One of the new Tax Code, effective 1 January 1999, set out the administrative framework for the new system. There are three levels of taxation, federal, regional, and local. The principal taxes collected at the federal level are the profit tax on organizations (with payments divided among all three levels of government), a capital gains tax, personal income tax (13% flat tax), the Unified Social Tax (replacing payroll contributions to four separate social benefit funds), a value-added tax-VAT-(with the standard rate reduced from 23% to 20% in 1999), excise taxes, a securities tax (0.8% on nominal value with exemptions for initial issues), customs duties and customs fees, and federal license fees. At the regional level the principal taxes are an assets tax (2%), a real estate tax, a transport tax (10%), sales taxes (maximum 5% in 2003), a tax on gambling, and regional license fees. Two turnover taxes at the state level, a social infrastructure maintenance tax (Housing Fund Tax) of 1.5% and a road users' tax of 2.5% (reduced to 1% in 2002), considered to be among the most onerous under the previous tax system, have been abolished: the Housing Fund Tax in 2001, and the roads tax in 2003. At the local level there are land taxes, individual property taxes (maximum 2%), taxes on advertising expenses (beyond allowable limits as a proportion of sales), inheritance and gift taxes, and local license fees.
In 2003, the corporate income tax was 24%, with payments split 6% to the federal budget, 16% to the state budgets, and 2% to local budgets. States are allowed to reduce their corporate rate to as low as 12%, so the total minimum rate is 20%. In 2002, the distribution was 7.5% to the federal government, 14.5% to the state governments (with an option to reduce to as low as 10%) and 2% to local governments. Foreign companies pay withholding of 20%, and dividends paid to non-residents are charged a 15% withholding rate (down from 18%).
The most striking provision in Russia's 1999 tax reforms is the replacement of its progressive income tax schedule (set out in the tax law of December 1991 with rates from 12% to 30%) with a flat tax of 13% applied to almost all income categories. The rationale is that the lower, simpler tax will generate more revenue by reducing Russia's pervasive tax-evasion. Exceptions to the 13% rate include a 30% rate on dividend income and on the income of non-residents from Russian sources, and a 35% rate on gambling income, lottery prizes, deemed income from low-interest or interest-free loans, some insurance payments, and excessive bank interest. The Unified Social Tax is a regressive schedule of payroll taxes ranging from 35.6% on income up to R 100,000 (about $3,300) to 2% (5% in during the transition period in 2001) on income above R 600,000 (about $19,800). All voluntary insurance payments are tax deductible.
Russia's VAT is its main indirect tax. Under the current tax reforms, the standard VAT rate is scheduled to be reduced from 20% to 18% as of January 2004, and to 16% as of January 2006. A reduced rate of 10% applies to educational books, newspapers and periodicals (until the end of 2005), other printed media (until the beginning of 2005), and pharmaceuticals and medical equipment. Exemptions from VAT for pharmaceuticals and license fees have been narrowed or removed. Exports are exempt from VAT, and as of 1 July 2001, exports to CIS countries receive the same VAT-exempt treatment. There are also excise taxes on items such as gasoline and other oil products, natural gas, alcohol, tobacco, and cars, motorcycles, and jewelry. Regional sales taxes of 5% are likely to be abolished by 2004.