Presidential Decree No. 2270, issued on Dec. 22, 1993, contained a hodgepodge of provisions. Those noticed immediately were the division of profit tax between the federal budget (13 percent) and local budget (a maximum of 25 percent), producing in most cases an increase in profit tax from 32 percent to 38 percent as of Jan. 1, 1994. The decree also increased the maximum level of assets tax to 2 percent and introduced a special tax for the support of the economy of 3 percent, to be collected with VAT.
Initially the foreign business community did not recognize the significance of another provision in the decree that amends profit tax levied on excess salaries. This is payable by all taxpayers regardless of tax exemption and even if they do not make the profit. It is based on the amount by which their salary bill exceeds a sum equal to six times the minimum wage. In practice this means that employers will pay an additional 38 percent tax on their salary bill.
Foreign-owned companies and those with foreign investment were exempted from this tax under the previous law, but there is no such exemption in the December decree.
However, this decree appears to contradict an earlier presidential decree, No. 1466, dated Sept. 27, 1993, "on improving work with foreign investments," which was intended to create favorable conditions for foreign investment. In particular it says that any new regulations that are adverse to the interests of foreign companies and joint ventures with foreign investment will not apply for three years to those enterprises that already exist at the time when such regulations come into force.
A tax at the rate of 38 percent on the wages bill is certainly adverse to the interests of foreign business, which should therefore be protected by the September decree. Unfortunately it is not all clear which decree takes precedence.
One might ask why foreign investors should expect preferential treatment under the profit tax law. The law "on foreign investment" of July 1991 guaranteed equal treatment with Russian enterprises, which at first sight seems fair. The problem is that the profit tax on excess wages does not affect taxpayers equally. It hits hardest those employers in the labor-intensive service sector where there has been the most growth recently and those (usually) foreign companies which pay higher salaries. It is certainly no way to encourage foreign investment.
Marcia Levy, an attorney with Norton Rose, has been practicing law in Moscow for two years.
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