Market Focus : Russian Tax Police Tally Up Victories--$3 Billion Worth : Despite the progress, cheating is a way of life. Millions of people and businesses short the government. Some haven’t paid a single ruble.
Mikhail, a young Russian making his fortune in the import-export business, has a lot of worries. The racketeers want more money, so does his driver, and for some reason the last batch of sneakers he imported from Hong Kong aren’t selling.
But paying his taxes isn’t a concern.
“My business hasn’t paid a single ruble in taxes,” he boldly admitted. “No one I know pays unless they’re forced. I won’t give them anything until they come and get me.”
Many Russians say they duck the duties because the burden is outrageously high thanks to the more than 40 different kinds of taxes that Russia heaps on citizens and their businesses. Moreover, people just don’t think they’ll get caught.
But that may be changing. To fight tax dodgers, the Russian government has created a separate, souped-up police force. Like the “Untouchables” who fought Chicago’s gangland crime wave in the 1920s and 1930s, the Tax Police aim to restore law and order, not to mention fiscal responsibility, to post-Communist Russia.
“There’s no reason to be afraid of us if you pay your taxes honestly,” said Sergei Almazov, head of the Tax Police. But people who shirk their responsibility, he warned, will be caught and punished.
Russians’ reticence to perform the central civic duty of paying their taxes illustrates how hard it is, after 70 years of communism, to transform this vast nation into a well-functioning democracy.
“We have to teach people that the money that they are paying isn’t gone from them forever,” Almazov, a former KGB officer, said in an interview. “It’s going to the state budget, which returns to the people in the form of government programs. To educate taxpayers so they understand this system is our most important role.”
Furthermore, Russia needs every ruble of revenue it is due.
Because the government has no mandatory withholding, no national identity numbers--that is, no easy way to monitor how much people earn in this cash-based economy--tax evasion is massive. Millions of people and enterprises fail to pay all that is due, Almazov said. The Tax Inspectorate estimates that it failed to collect $9 billion due in 1993--about a quarter of its anticipated revenue.
The Russian government founded the Tax Police in 1992 to aid the Tax Service--the agency responsible for levying and collecting taxes--by investigating possible tax cheats. Moreover, officials hoped that a strong enforcement arm would intimidate Russians into paying.
For the muscle to get the job done, the Tax Police was endowed with enormous powers: It can seize assets, throw suspected tax evaders in jail and levy huge penalties. It entices hard work from its 11,000 agents--many of whom came from the former KGB, the Defense Ministry and other security organs--by rewarding them with a percentage of the amount they recover, with no upper limit.
This incentive system is supposed to discourage tax collectors from taking bribes. Still, in this land of rampant corruption, the potential for official malfeasance is immense. Politicians, for instance, can suggest to the tax force that their enemies be investigated.
Meanwhile, some entrepreneurs say that they pay off the Russian “Untouchables.”
“The situation (with corruption) exists--we don’t try to hide it,” Almazov admitted, but he said only four Tax Police employees were convicted of corruption in 1993.
Also open to abuse is the Tax Police’s right to reward informants who turn in tax evaders with up to 10% of the take that results from their tips. Sometimes the motivation of the tipster is suspicious.
“A very small number” of tipsters have come forward, said Almazov, but most leads are pursued. “If someone comes to us with information, we have to figure out if the person is interested (personally in the case),” he said. “It could be a competitor.”
“But if it checks out, we have the right to reward this collaborator,” Almazov said.
Despite these problems, the Tax Police has been a financial success. Since it was established, the unit has recovered 3.5 trillion rubles, about $3 billion, through investigations and audits--fully 8% of total government revenue for the period. About one business in five has been audited, Almazov said.
But the Russians’ tax-evading attitude is hard to change. To help put fear into their compatriots’ hearts, the tax cops have focused their energy on a few high-profile, multimillion-dollar cases. Among their targets: the five-star Grand Hotel Europa in St. Petersburg and the former state insurance company, Ingostrakh.
In a move that has brought them a flood of publicity, the Tax Police also spearheaded the government’s crackdown on the MMM investment fund, whose pyramid scheme collapsed in July in a spectacular securities fraud.
The tax authorities began investigating MMM in 1992, but it wasn’t until this year that the Tax Police--with the government’s blessing--started publicly warning that MMM was financially unstable and violating tax laws. The tax cops’ pronouncements became so strong that, eventually, they spurred a run on the fund. Share prices crashed from more than $55 to just 50 cents in a few days.
The Tax Police tried to cement its image as the protector of Russia’s new investor class by arresting MMM President Sergei Mavrodi, rappelling down ropes from the roof of Mavrodi’s house in a spectacular show of force. Mavrodi has since been charged with tax evasion.
Nevertheless, the MMM assault backfired. Instead of thanking the unit, many of the estimated 5 million angry MMM shareholders blame the tax authorities for wiping out their investments.
“This is Russia--our mentality is different,” said an exasperated Nikolai Medvedev, tax-force spokesman. “We had decades where the government gave and the government took away. . . . People just haven’t adjusted to the new reality.”
The Tax Police are likely to be involved in the MMM affair for months to come. Officials are starting to sort through Mavrodi’s complex web of 44 shell companies.
Almazov hopes that in the long run, the Tax Police’s image will be enhanced by its dealings with MMM. “Our people are trying to do something good,” he insisted.