Russia mulls how to boost inward investment via taxation

Prime Minister Mikhail Mishustin will soon have been in office for 18 months. His government was preoccupied with the pandemic for much of its first year, but now it can return to its main task – making President Vladimir Putin’s long-term goals a reality. One of these goals is an ambitious target to increase inward investment into the Russian economy 70 percent through 2030.

• While Russia is isolated on the world stage and at risk of further Western sanctions, it’s hard to bet on a rise in foreign investment. Instead, the authorities are hoping to stimulate investment from leading Russian businesses.
• Mishustin berated businesses for “greed” in a speech to the parliament this week, warning that companies that “aggressively withdraw dividends” could face a progressive income tax.
• Parliamentary speaker Vyacheslav Volodin approved of both the topic and the rhetoric. “People earn huge sums in our country, then take it away,” he complained. “Nobody learns from what life is telling them and the way sanctions and unfriendly acts by other countries, as a rule, result in the freezing of these assets.” Volodin demanded Mishustin explain what the government was doing “to prevent more chaos when [businessmen] take everything and drain us dry”.
• In response, Mishustin reccounted how the government is changing or abolishing tax agreements with offshore jurisdictions. Russian companies transferred 4.3 trillion rubles ($58 billion) abroad in 2019 and more than a quarter of that money went to countries where the Ministry of Finance has since closed tax loopholes, he said.
• Mishustin also mentioned a progressive income tax in reference to Putin’s recent state-of-the-nation address in which he promised to make a decision on “adjusting tax legislation” by the end of 2021. The aim is to ensure that record profits enjoyed by the corporate sector remain in the country and are not spirited overseas. Thus far, it is unclear exactly what kind of adjustment the authorities have in mind. “The president said we need to do something about companies that transfer their profits abroad, so we need to do it. However, nobody seems to understand how,” one official involved in discussions told The Bell at the time.
• None of the economists or tax lawyers interviewed by The Bell could point to a precedent anywhere in the world for such a progressive income tax based on money transfers abroad, and, even if it could be done, they all doubted that it could lead to a Russian economic miracle.
• And businesses themselves are in no hurry to share their profits with Putin. “I don’t think it will be hard to get around this,” one top financier told The Bell.

Why the world should care

It makes sense for Putin and Mishustin to go after the profits of Russian companies, and Putin has spoken about the anticipated onset of a commodity ‘supercycle’. Investors in Russia should be aware that the Russian authorities likely have plans for any profit windfall experienced by Russian companies.