Large maneuvers: what tax changes to expect from the authorities

The government entered into a new season of budget cutting, in the conditions of melting of reserves and falling oil revenues government think about additional sources of revenue. In June, “Vedomosti” reported that officials are discussing “revolutionary tax idea” to raise VAT, reduce premiums), in August, a Federal official told RBC that the VAT within the tax manoeuvre can be upgraded from mid-2018 or 1 January 2019. Although the government has never officially confirmed the existence of such plans, economists at HSBC have already evaluated the pros and cons of “fiscal devaluation” involving a reduction of taxes affecting the cost of production (insurance contributions for workers or income tax), taxes on final consumption, such as VAT. The press service of the Ministry of Finance did not respond to a request RBC.

Why the defense Ministry is thinking about raising taxes?

In late September, the Finance Ministry plans to submit proposals for balancing the budget for 2017-2019, said last week the Deputy Minister of Finance Ilya Trunin. When planning the budget for the next three years the Ministry of Finance proceeds from the nominal level of spending 15.79 trillion this year, which has been proposed up to 2019, and the budget deficit to 3.2% of GDP in 2017. the budget Deficit is projected to decline by 1 percentage point annually, said Finance Minister Anton Siluanov. This means that you will necessarily have to increase income. In order to meet the target deficit, the Agency in the next three years need to find 3.5 trillion rubles, according to “Vedomosti”.

The Finance Ministry will tap the Reserve Fund, but it will be exhausted in the next year, said on 9 September, Deputy Finance Minister Alexey Lavrov. After that, the financing of the budget deficit will be financed from the national welfare Fund. This year, the Ministry of Finance three times already used the Reserve Fund to cover the deficit of the budget and have allotted already to 1.17 trillion rubles in the Reserve Fund remains at approximately 2.1 trillion and at the end of the year will be about 900 billion.

Another source is the loan program net borrowing for the next year increased four times compared with the year 2016 — with 300 billion rubles to 1.29 trillion rubles. But the Siluanov in an interview with RBC in June of this year recognized that such an increase carries a greater risk: “will we have to more aggressive participation in the market to move to short-term borrowing? Not all banks in such large borrowing would be willing to invest in 10-15-year bonds of the state. The risk to slide into t-bills — as it was some time ago — is one of the key risks, so we are talking about the need to reduce the budget deficit”.

One of the options on where the money has already been found: the Finance Ministry plans to extend to 2017 the rate of the increased severance tax for oil companies and “Gazprom”, told RBC two officials of the Agency. “When we entered [a higher rate] in the beginning of the year, we got inside it was this understanding that it is not for one year but forever,” says one of the interlocutors RBC. “As the met in 2016 increased one-time and next year the tax burden on the oil sector falls, then the next year, too, need to do something,” adds another official.

The following year, with Gazprom planning to raise RUB 100 billion, if the burden of the severance tax will remain the same as this year. “Will there be an additional burden on “Gazprom” [over 100 billion rubles], the government must decide,” the official said.

“Gazprom” it is planned to withdraw 170 billion roubles, 200 billion roubles will be collected from oil companies, but because of the imposition of added tax revenue (for Mature fields is equivalent to tax exemption), the Ministry of Finance will lose 50 billion rubles total for the oil and gas industries will gather 320 billion rubles, wrote “Vedomosti”. These amendments, if approved, will be submitted to the Duma together with the budget bill, said RBC Finance Ministry official.

Gazprom has already warned that increasing the tax burden may lead to the fact that the company would be forced to reduce investment. 31 August conference calls with investors, head of financial-economic Department of “Gazprom” Alexander Ivannikov said that if the decision on increase of tax loading will be accepted, “it will reduce the financial results of the company <…> that would require adjustments to the budget <…> including reducing the investment programme and the increase in borrowing” (quoted by “Interfax”).

6 September, Deputy Prime Minister Arkady Dvorkovich held a meeting on taxes for the oil and gas industries. The representative Dvorkovich did not comment on the contents of the meeting. One of the topics of the meeting was the new system of taxation for the oil industry. Its discussion is already a few years: the energy Ministry proposed previously to substitute a severance tax on the financial result for depleted fields and test new tax on several pilot oil fields. The Ministry of Finance was against this approach and proposed to introduce a tax on added income, which was to replace the export duty, so that eventually the oil companies only paid the tax on the income from the sale of oil and severance tax and duty — no.

Ilya Trunin after the meeting said that the Finance Ministry and the energy Ministry agreed on an approach in which a new taxation system for the oil industry will have different settings for different types of deposits. “We propose to focus on the introduction of tax <…> on two groups of deposits — new and old. Our proposal is to set a limit on the volume of production and through him to distribute between the companies (the tax burden). For Greenfield projects we have currently one mode, for brownfields is another. Our task is not to degrade the regime for Greenfield projects, so there parameters are slightly different-but this does not mean that from somebody, the budget will receive less from someone more. Get a bigger budget from those where there will be more added income,” — said Trunin (quoted by “RIA Novosti”). Dvorkovich said that gave a month for revision of bylaws, but not sure that the system is expected to be launched in 2017.

Are there plans to raise other taxes in 2017?

The government still believes that raising taxes should not be until 2018, said RBC interlocutor in the White house.

However, discussing the increase and personal income tax, profit tax, and value-added tax, said a source in the financial-economic bloc of the government. “Vedomosti” reported that an increase of 1 percentage point each of the key taxes can bring from 170 billion to 324 billion rubles Decision date [increase] no. Discussed and time, and what taxes will be raised, which are not. While there are predictions only [about] what will happen if nothing changes,” says the source.

Presidential aide Andrei Belousov on 1 September stated that “taxes are always necessary to reduce”. He was commenting on the idea of the Finance Ministry about raising the major taxes, such as VAT, income tax, income tax, insurance premiums.

Tax increases should not occur before 2018 — this should be ready for public opinion, the Director of the Center for macroeconomic research of Sberbank Julia tseplyaeva.

Can to lower taxes?

Together with a possible increase in the tax burden the government is discussing several options, the so-called fiscal devaluation, which should mitigate the tax increase, said earlier RBC Federal official.

Fiscal devaluation was mentioned in the recommendations of the IMF and the European Central Bank to overcome the crisis in the Eurozone. Its essence is to reduce labor costs and thereby to reduce the production costs of exporters. Thus it is possible to improve export competitiveness without resorting to currency depreciation.

One of the options to lower premiums while increasing VAT, said RBC official financial-economic bloc of the government. Or we can talk about the VAT increase from mid-2018 or 1 January 2019 while reducing income tax. The source of “Interfax” in June, said that we are really talking about the continuation of the devaluation effect only through the fiscal mechanism. The potential weakening of the ruble for the most part exhausted after the rate fell in 2014-2015. More accurate calculations for possible fiscal devaluation, the Ministry of Finance may present after the September elections to the state Duma, reports “Interfax”.

HSBC, in its study in August reported that a reduction in overall contribution rates in the Federal extra-budgetary funds from 30 to 20% and increase VAT to 25% (from current 18%) would lead to annual losses of budget of 300 billion rubles, wrote RBC. Another negative point is the acceleration of inflation by increasing VAT. Therefore, the maneuver is likely to be delayed until 2019 in order not to put pressure on achieving 4% inflation by year-end 2017″ (the promised goal of the Bank of Russia), suggests HSBC. Lower premiums would help businesses, but to compensate them due to the increase in VAT, according to associate Professor of Economics and Finance, Ranepa Alesana Lisanova, not worth it.