Premier Announces 5-Year Tax Holiday Plan Fails to Satisfy Western Executives

The Russian government ?an-nounced plans Monday for a five-year tax holiday and other incentives for foreign companies, but officials failed to satisfy concerns of top Western business executives about the investment climate in the country.Prime Minister Viktor Chernomyrdin told a conference designed to promote foreign investment and protect it from legal uncertainties that the government plans to exempt foreign firms from paying profits tax for five years and intends to remove tariffs on imports of materials for production by joint ventures.Chernomyrdin also said all foreign-owned companies and joint ventures would be given a three-year exemption from any changes in legislation that are adverse to business. For those companies with more than 30 percent foreign capital and with foreign investment of more than $100,000, the exemption would be for seven years, he added. Chernomyrdin said the proposed new measures would "reduce the risks for foreign investment in the Russian economy by the end of this year."Russia is considered by foreign businessmen a high risk mainly because of constantly changing legislation which limited direct foreign investment to only $2.7 billion over the past six years, according to government estimates.In the latest example, two Duma subcommittees voted on Monday to reimpose restrictions on foreign banks that were partially lifted by a recent decree issued by President Boris Yeltsin (Page 11).The announcements of new incentives for foreign investors were made at the founding meeting of the Foreign Investment Council, which is designed to provide better communications between foreign businessmen and Russian officials in order to improve the investment climate.Top Russian officials, including acting Finance Minister Sergei Dubinin, Economics Minister Alexander Shokhin and Central Bank chairman Viktor Gerashchenko assured the Western business officials at the conference that foreign investment would be given full support by the Finance Ministry and the Central Bank. But as the official speeches ended and the parties opened an exchange, Russian officials began to sound less confident. They were visibly confused by questions about why Russia needs to pass another law, exempting foreign investors from unfavorable changes in the laws only eight months after a decree to do the same thing was signed by President Boris Yeltsin.Shokhin readdressed the question to Dubinin who, after a pause, began speaking about Russia's tax system in general. The question was answered later by Scott Antel, tax department manager at Arthur Anderson. Antel said that the decree had never been enforced, and many businessmen who acted upon it lost money only a couple months later when the government extended an excess wage tax to foreign firms.Antel said business people would be very skeptical about the latest promise of legal stability from the government. "Russian officials are welcome to pass new laws, but they should also make sure they are enforced," he said.Another businessman said: "The decree by Yeltsin never worked and the new one will not work either."Maya Fishkin, an associate with the law firm White & Case, said foreign companies "must be brave" to protest unfavorable legal changes by refusing to pay taxes they feel are not valid, because "the tax service is not controlled by anybody and fines are so high."Not all business officials were so pessimistic. Michael Henning of Ernst & Young told Reuters, "The key issues for foreign investment are predictability and stability and I think they are going to address them."The conference was attended by top executives of 14 major multinational companies representing investments in fields ranging from manufacturing and oil to finance and banking.The companies attending were: Asea Brown Boveri, BASF, Citicorp, Coca-Cola, Ernst & Young, Fleisch KG, Mobil, The Pioneer Group, Procter & Gamble, Raytheon International, United Technologies, Gulf Canada, Mitsui and Mars.