Oda Russian Commercial Law 2007-1

Ministry of Natural Resources, which is the “basic user of natural resources”. The Ministry was not renamed. The protection of the environment does not appear in the name of the Ministry as it did before 1996.54

The move has been criticised by some, who regard this as a result of pressure from the powerful companies in the industry which maintain that environmental regulations are hampering economic development. Environmentalists argue that this is tantamount to “putting an alcoholic in charge of a vodka shop”.55 At the time the draft 2002 Law was being discussed, the deputy Minister of the Ministry of Natural Resources addressed such apprehensions and assured that there was a separate administration for the protection of the environment within the Ministry. However, this may not be suf cient. Ecological review, which is a mandatory prerequisite to economic activities which may negatively affect the environment, used to be approved by the Goskomekologii until it was abolished in 2000. After 2000, it was approved not by the head of the State Environmental Protection Administration, but by the Minister of Natural Resources.

Organisation of the administrative apparatus in charge of environmental protection took another twist in 2004 as part of the “administrative reform” under the Putin administration. Since the reform, the agency generally in charge of supervision of the compliance with environmental requirements is the Federal Service of Supervision for Ecology, Technology and Nuclear Power (Rosstekhnadzor). This is an agency which is directly subordinate to the government (pravitel’stvo) and is separate from any ministry. On the other hand, within the Ministry of Natural Resources, there are four agencies involved in the protection of the environment. These are the Federal Service for the Supervision of the Use of Nature (Rosprirodonadzor), the FederalAgency for Forestry, the Federal Agency for the Use of Sub-Soil, and the Federal Agency for Water Resources. Rosprirdonadzor has jurisdiction covering certain natural resources, such as water pollution including the sea, continental shelf and exclusive economic zones as well as the use of sub-soil.56

However, the demarcation of power of these agencies is not clear.According to the 2004Annual Report, the Federal Service for the Supervision of the Use of Nature completed and approved 27 cases of ecological review in 2004, in which one contained a negative conclusion.57 It also carried out the review of the TEO of a neutron observatory near the Lake Baikal and project of sewage plant in the City of Baikalsk.58

54V.V.Guchkov ed., Ekologicheskoe pravo, Moscow 2000, p.67.

55www.ecoterra.org.ru

56Doklad 2004, supra, pp.375, 379.

57Ibid., p.395.

58Ibid., p.395.

An OECD report pointed out as follows:

Russia’s tax system has performed very poorly since its creation in 1991 for a number of reasons. To start with, it is a cumbersome system. The nominal tax rates are very high. There are numerous exemptions for a wide range of favourably treated taxpayers. Emergency tax commonly involves draconian penalties, but these penalties are applied at the discretion of the of cials. The entire system is open to abuse and corruption. Regional authorities routinely issue guidelines that contradict centrally issued instructions, where the latter exist. In the absence of clear legislation and procedure, tax inspectors have tended to act autonomously, leading to a very uneven treatment of taxpayers...... Not surprisingly, the outcome is a tax system which fails to produce adequate revenue to government. Furthermore, it impedes growth, puts off foreign and domestic capital and drives investment under ground.3

Indeed, at the initial stage, government policy was to make the taxable basis as broad as possible. Various kinds of Federal taxes were introduced; the number reached fty at one stage.4 Between 1994 and 1997, agencies of constituent entities and municipalities introduced more than 100 taxes and levies which were not provided by the then Basic Law on the Taxation System.5

The quality of the tax laws introduced in the early 1990s was far from perfect. They were prepared only within several months and amendments had to be contemplated immediately after their enactment and before their taking of effect. Shortage of time, absence of knowledge of international experience in shaping the tax system, and uncertainty of the future course of structural reform of the economy were the primary cause of such defective legislation.6 Various changes which, between 1992 and 1999, were introduced every year in the tax legislation merely succeeded in solving some partial problems, but failed to address fundamental issues. The system was simply characterised as “unstable and unpredictable” and gave rise to severe criticism from Russian companies as well as foreign investors.7

For most of the time since 1991, the system was regulated not only by laws, but by over one thousand subordinate acts, i.e. decisions of the government, instructions, letters, explanations of the tax authorities. Due to the sheer number of these acts, it was dif cult to be guided by them in a speci c case. In some cases, interested parties contested the validity of such subordinate acts in the

3 OECD Observer, No.215, January 1999.

4Kucherov, supra, pp.22-23.

5 R.F.Zakharov et al. eds., Kommentarii k nalogovomu kodeksu RF, Moscow 2005, p.88. 6 S.D.Shatalov, Razvitie nalogovoi sistemy Rossii, Moscow 2000, p.10.

7Ibid., p.11.

Constitutional Court and the Supreme Court; in some cases, the courts acknowledged their incompatibility with the law, and even with the Constitution.

The lack of stability in the tax regime has affected foreign investors. In one of the rst oil projects in Russian with foreign investment – Polar Lights – the original three taxes increased to 22 with the Russian government’s take quadrupling. Moreover, there was even an attempt by the local government to take the foreign investor to court for not paying a mineral reproduction tax from which it was exempted in the original licence.8 Another celebrated case involved a tobacco company, JT International. The company was faced with a 85 million US dollars bill of value added tax from 2000. After several years of a costly struggle in the commercial court, the Company managed to reduce the amount of payment but not substantially.

The need for a comprehensive tax reform had been acknowledged in Russia for some time. As the market economy developed in Russia, it became obvious that the inadequate tax system was an obstacle to the economic development of the country. Since 1996, several versions of the draft Tax Code were submitted to Parliament by the government. However, since the government proposals affected the interest of powerful lobbying groups, Parliament, under various pretexts, delayed the discussion and the adoption of these drafts.9

In the end, the government split the Code in two parts. The draft Tax Code (parts One and Two) went through its rst reading in April 1998, but only Part One was adopted in July 1998 and came into force in January 1999. Part One of the Code covers the basic system of taxation, rights and duties of tax payers and other parties such as tax agents, and the power of the tax authorities and the procedure of discharging the duties by them. The enactment of Part Two, which covers speci c taxes, took more time. Four chapters of Part Two (individual income tax, uni ed social tax, value added tax and excise) were adopted in July 2000. In July 2001, the Chapter on pro t tax was adopted. Other chapters of Part Two, including chapters on tax on mineral resources and sales tax followed. In the meantime, Part One of the Code has been amended many times.10

Despite the fact that the draft Tax Code had been “watered down” by Parliament, some important provisions and novelties were lost and doubtful provisions added in the process, the Code clearly de ned the rights and duties of the “partcipants” in tax relations, and introduced provisions on the process of tax payment and control.11

8 The Russia Journal, June 5, 2000.

9Shatarov, supra, p.14.

10Agood overview of the system is given inA.Taferner, “Tax Reform –Act II”, European Taxation, February 2001, pp.48-60.

11Shatarov, supra, p.15.

3TAXES AND LEVIES

The Tax Code covers “taxes and levies (sbor)”. Tax is de ned in the Code as a “mandatory, individual and non-gratuitous payment collected from organisations and individuals in the form of alienating the money which belongs to them for the purpose of nancing the activities of the state and/or municipal governments”. Levies are de ned as “mandatory payments collected from organisations and physical persons which is one of the conditions of the state agencies, local government agencies and other entities as well as of cials for performing legally signi cant acts, including the granting of rights or licences” (Art.8).

In order to create a tax, the scope of tax payers as well as the essential elements of the given tax has to be determined. This includes the object of tax (e.g. pro t, assets, income etc.) taxable basis, taxable period, tax rate, methods of calculating tax, methods and terms of tax payment (Art.17).

There are three layers of taxation in Russia: Federal, regional and municipal. In addition to the Federal tax, constituent entities of the Russian Federation as well as local self governments (municipalities) are empowered to create taxes (Constitution Art.132). Taxes and levies at the level of constituent entities of the Russian Federation are called “regional”, while those at the level of local self governments are called “municipal” by the Tax Code. The Tax Code was amended in 2004 in respect of regional and municipal taxes. There was a provision to the effect that regional and municipal taxes and levies were created, modi ed and abolished by the laws of the constituent entities on taxes and levies and normative legal acts of the local self-governments respectively (former Art.3, para.5), but this provision was replaced by the following paragraph:

No one shall be imposed of an obligation to pay tax, levies or other payments which have the characteristics of taxes and levies as provided in the present Code, which are not provided in the present Code or established by the procedure different from the provisions of the present Code.

Already in the original version of the Tax Code, regional and municipal taxes which were not listed in the Tax Code could not be created. The 2004 amendment has made it clearer that entities other than the Russian Federation may not create taxes and levies, unless they are created within the framework of the Code. This is an important step towards certainty and stability in the system.

As of August 2006, there are nine Federal taxes, three regional taxes, and two municipal taxes. Part One of the Code lists the following taxes at various levels:

(a)Federal Taxes (Art.13)

i)value added tax;

ii)excise;

iii)individual income tax;

iv)uni ed social tax;

v)tax on pro t of organisations;

vi)tax on the extraction of useful minerals;

vii)water tax;

viii)payment for the use of objects of the animal world and biological resources of water;

ix)state fees.

(b)Regional Taxes (Art.14)

i)tax on the assets of organisations;

ii)tax on gambling business;

iii)transport tax.

(c)Municipal Taxes (Art.15)

i)Land tax;

ii)Tax on the assets of individuals.

4BASIC PRINCIPLES AND RULES OF TAXATION

The Code sets out basic principles of taxation which include the following (Art.4):

i)universality and equality of taxation;

ii)non-discriminatory nature of taxation (prohibition of applying different rate of tax, providing of privileges based upon the form of ownership, citizenship, or place of location);

iii)prohibition of taxation which inhibits the realisation by individuals of their constitutional rights;

iv)prohibition of arbitrary taxation – requirement of “economic rationale” for taxation;

v)requirement of accuracy and speci city of tax laws;

vi)interpretation of laws in favour of tax payers in case of irremovable doubt in interpretation, contradiction, or ambiguity of the tax law.

Russian tax law has not always been fair and non-discriminatory. In the early 1990s, by presidential decrees, some favoured organisations such as the Russian