Russia’s Finance Ministry has submitted to the government the proposed amendments to the tax code, which includes raising corporate income taxes and introducing a progressive personal income tax scale. The changes to the tax code are expected to be passed by the State Duma in the current session before autumn 2024 and come into force in 2025.
As followed by bne IntelliNews, Russian President Vladimir Putin promised a tax overhaul this year, including increasing the tax burden on people with higher incomes and closing corporate tax evasion loopholes.
MinFin proposed raising corporate income tax from 20% to 25%, while abolishing exchange rate export duties. The mineral extraction tax (MET) for iron miners could be raised by 15%, while for phosphate and potash fertiliser producers by 2-fold and 2.3-fold, respectively.
IT companies, for which a zero rate of income tax has been in effect for the last two years, will start paying tax again after the reform - at the rate of 5%.
At the same time, it is proposed to indefinitely extend the mechanism of investment deduction, as well as to introduce a special tax deduction system for companies from priority industries.
In terms of personal income, MinFin proposed to set thresholds for the progressive personal income tax scale:
for income below RUB2.4mn ($26,750) per year - 13%;
from RUB2.4 to RUB5mn - 15%;
from RUB5 to RUB20mn - 18%;
from RUB20 to RUB50mn - 20%;
over RUB50mn ($560,000)- 22%.
Progressive scale for investment profit on dividends is proposed in the form of 13% for income up to RUB2.4mn, 15% for income above this amount. Similar scales are proposed for income from deposits and sale of securities/shareholdings, as well as income from the sale of real estate.
Notably, despite previous “social justice” motivation of the tax reform, investment incomes mostly affecting the richest Russians, maintained a flat taxation rate. The ministry estimates that just over 3% or 2mn people of the working population will face an increased tax burden as a result of the reform (less than previously expected 3mn-5mn people).
Taxes at an increased rate will be counted only on the amount exceeding each previous threshold. That is, a person with an annual income of RUB10mn would pay 13% on the first RUB2.4mn, 15% on the next RUB2.5mn and 18% on the remaining 5mn. In total, compared to the current rates, such a person will pay an additional RUB0.3mn annually in income tax, The Bell estimated.
Exceptionally, allowances and payments earned in military combat operations will not fall under the increase in personal income tax.
MinFin estimates that both corporate and personal tax reforms will increase consolidated budget revenues by RUB2.6 trillion ($67bn) already in 2025 (3.8% of the planned revenues). The effect of the corporate profit tax increase is estimated at RUB1.6 trillion, while the effect of the change in the personal income tax is estimated at RUB0.5 trillion.
To put that into context, Russia’s budget deficit last year was RUB3.4 trillion and this year is forecasted to be RUB1.6 trillion. The income and corporate tax hikes should generate extra revenues that will more than cover the deficit this year and MinFin predicts that next year, when the new tax rates come into effect, the budget will be balanced again.
Russia’s progressive personal income tax thus remains modest and accounts for less than 20% of the total additional revenues from the tax reform. As a comparison, raising the corporate profit tax to 25% would bring the budget three times as much.
Russia will still have the least progressive personal income tax scale among the BRICS countries, Bloomberg's chief economist for Russia Alexander Isakov reminds. Russia's top tax bracket (22%) will still be lower than Brazil’s (27.5%), India’s (30%), South Africa’s and China’s (45%). Isakov warns that this leaves space for further hikes and suggests that people near the top of the progression scale should prepare for another 30-35% hike by the next presidential election cycle in six years.
A 'tax on the rich' has already been in effect in Russia since 2021. Those with the annual earnings of RUB5mn or more must pay personal income tax at a higher rate of 15% instead of 13%. However, the government has repeatedly stopped short of introducing a true progressive income tax system.
The Bell previously warned that progressive income tax could hurt the middle class, as most wealthy Russians have resources to optimise and evade taxes.
The progressive personal income tax could also have a negative impact on virtually all macroeconomic indicators of Russia in all scenarios, a recent study by the National Research Institute of Finance of the Ministry of Finance asserted.
The simulations in the paper suggest that in all cases, and especially when the aggregate tax burden grows, changes in income tax rates would have a depressing effect on economic growth and most macro-indicators.
In terms of the policy interest, the authors see progressive income tax as relevant fiscally due to the expected continuous decline in oil and gas revenues due to sanctions and the 'green transition'.
But raising the income tax rate for top earners in Russia to 20% or 25%, up from current 15%, would lead to a loss of 0.3% to 1.3% of GDP in the long term, and despite the growth of redistribution in favour of citizens with low incomes, aggregate consumption in all cases could decrease by 0.5%-1.7%, the report claimed.
