Foreign businesses will be hit hard by the tax man if a draft bill to impose an excess-wages tax goes on the books, dashing long-held hopes of an exemption, lawyers and accountants say.


The State Duma passed the third reading of a bill Jan. 20 that stipulates that wholly owned foreign companies and permanent representative offices in Russia will not be granted exemption from the tax.


"It makes it pretty clear we're stuck with the tax," said Alexander Chmelev, an attorney with Baker & McKenzie.


The 38 percent tax is imposed on companies whose employees' average monthly wage exceeds six times the national minimum wage -- currently set at 20,500 rubles ($5) a month -- rendering the tax payable for any employee earning more than $30 a month. While lawyers say that foreign companies are not technically excluded from paying the tax, many businesses have withheld payment in the expectation that exemption would be forthcoming.


The Finance Ministry and the State Tax Service had proposed in an earlier draft to exclude foreign firms from the tax, but this bill died in the Duma. Western consultants are still optimistic, however, that the present bill could be killed by the Federation Council or President Boris Yeltsin. "There has been a lot of Western persuasion to eliminate this tax," said Michael Wagne of Deloitte & Touche. "We would be surprised to see (the bill currently before parliament) go all the way through."


Wagner said firms offering professional services such as accounting, law and consulting would be likely to bear the brunt of the tax, because a large chunk of their expenses are eaten up by salarie. If implemented, the tax could well result in employers turning away from Russian nationals, said Eric Michailov, a lawyer with White & Case.


"It provides a disincentive for both employer and employee to declare their full income, and a disincentive for foreign companies to hire here," he said. As a result, direct foreign investment could fall victim to the tax, Wagner said. "Overall, it has a negative impact for investment, because it increases your cost of operating in Russia."