18.01.08

How can money from the first wave of privatization be returned to the government? The authors of the bill "On the Modification of the First and Second Tax Codes of the Russian Federation" have attempted to answer this complicated question. The bill, officially submitted to the State Duma, is being reviewed by special committees. Because the bill's authors represent those parties who came in last place in State Duma elections, the bill's acceptance is not certain, but the likelihood is still extremely high.

The authors propose that businessmen, who have since sold their enterprises on loans-for-share auctions, pay a one-time tax of 20 percent from surplus profits for the first ten years. They believe that about 1.5 trillion rubles can be returned to the state budget. The bill will concern about 200 major companies, mostly from the fuel and energy complex, and the mining, metallurgical and chemical industries. It could take force January 1, 2009.

It’s important to remember that this only concerns the so-called “first-wave of privatization” or “Chubais’ privatization” (1992-1998), when major companies were privatized through auctions. It’s hardly a secret that the price of purchase was often far below the actual worth of the company.

In early December the head of the Russian Union of Industrialists and Entrepreneurs, citing surveys carried out by the All-Russia Public Opinion Research Center, said that 58 percent of domestic business representatives are open to reviewing privatization transactions from the 1990s. The last review of the consequences of the "first wave" took place in 2005, when the Audit Chamber looked at the issue and estimated that $905.61 billion in losses had accrued to the State budget over 10 years. The base part of the losses was from an "unclear description and undervaluation of assets."

The new bill is not yet included in the Duma database, but according to its authors the tax base will be calculated as the difference between the net profit received within the first ten years of activity and the initial cost of the purchased stock. If the difference is positive, a tax will be imposed on the sum. As one author specifies, this initiative will only affect those who purchased their companies on the primary market during the loans-for-share auctions, and will not be of concern to bona fide purchasers. Exceptions will also be made for those who purchased property later.

Some entrepreneurs are convinced that this initiative will be a blow to the most successful businesses and is absolutely populist in character. Business owners who purchased their enterprises cheaply when they were in stages of decline, but have since managed to increase capitalization, will be required to pay more than inefficient owners. Many business owners are certain that even the discussion of such questions could worsen the investment climate in the country.

Tax experts say that the introduction of taxes post factum is not allowed under the Tax Code, and consequently if someone wanted to question the new law they would be correct to do so. They also question the use of the term “surplus profit” as there is no such concept currently in Russian legal terminology. Records should clearly show to what degree a proprietor lawfully received income, but it's actually a complicated matter. According to the laws of that time, many acted legitimately.

Experts say that calculating the size of the tax will be no easy matter, taking into account devaluation, inflation, and changes in currency rates. Most likely the bill will not receive support since, as one expert has said, “questions of ownership are extremely slippery and it doesn't pay to push the issue with the global community watching.” Similarly, discussions about the "return of public property" will go on indefinitely in Russia.

Such a tax, however, is not unheard of. The last country to study this problem was Great Britain. "Windfall tax" – a tax on unexpected profit – was introduced by Labourites in 1997. It concerned the taxation of surplus profits of former state companies privatized from 1982-1993. Thus the introduction of the tax happened after 18 years of inner-party discussions. In Russia, however, rather than discussing and considering the issue in earnest, talks of a privatization tax are more dependent on political factors. Questions such as “Who should be taxed?” “How much?” and the main one: “What for?” continue to arise as though in passing.

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