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The RF Ministry of Finance has prepared a draft of the major trends of the RF tax policy, which proposes a number of innovations, aimed at creating more favorable tax environment for the growth of national economy.

Table BASIC INDICATORS OF THE RF FEDERAL BUDGET EXECUTION IN 2007 2009 (% 0F GDP) February February February 2007 2008 2009 Revenues 23,9 25,9 21,8 23,65 18,Expenditures 18,4 16,8 17,8 21,09 21,Deficit ()/ Surplus (+) 5,5 9,1 4,0 2,6 -2,Source: RF Ministry of Finance Table 1 presents the basic parameters of the federal budget execution in 2007-2009, and, as can be seen, with a relatively stable level of budget revenues in January-February 2009, the budget expenditures have increased, the budget expenditure scope was just over 21 per cent of GDP. Maintaining this level of expenditure during the year will lead to the federal budget deficit, because due to the financial crisis, one cannot expect the sustained high level of the budget revenue, like in the first quarter of 2009, and as of the end of the year result.

It is important to note, that if the RF budget revenues from the management of the Reserve Fund and National Welfare of 2008 are not taken into the account, the Russian federal budget should are disregarded, the RF budget is in deficit already from January of the current year. Revenues from those funds management, accounted in budget revenues for January-February 2009, have amounted to 4 per cent of GDP and 1.3 per cent of GDP, accordingly. Moreover, it should be noted, that in the first quarter of the current year, the GDP should get reduced, and according to some estimates, it has already decreased by per cent.

As of the results of January-February 2009, revenues from export customs duties decreased by nearly 4 per cent of GDP, as compared with a similar indicator of preceding year, while this is the most profitable source among other federal budget lines, which ensures about 20 per cent of the total tax revenues. Within the same period, mineral extraction tax, which makes about 10 per cent of budget revenues, has declined by 2.per cent of GDP. The tax on corporate profit tax, taxes on goods, imported to the territory of the RF and import duties have been decreased by less than 1 percentage point in the period under review. The value-added tax on goods sold in Russia made the exception.

Revenue from that tax have grown by 2.2 per cent of GDP and nearly 2-fold in nominal terms. However, this is not related with improvements in VAT collection, but is due to the BUDGETARY AND TAX POLICY amended procedure of this tax, payment, as since early 2008, VAT payments have to be made quarterly.

Table MAJOR REVENUE LINES OF THE RF FEDERAL BUDGET WITHIN 2006 2009 (% IN GDP) February February 2007 2008 TOTAL BUDGET REVENUES 23.91 25.89 21.84 23.1. Corporate income tax 1.97 1.40 1.79 0.2. Unified social tax 1.24 1.26 1.19 1.3. Tax on gods and services, sold in the 4.61 3.07 2.65 5.Russian Federation territory 3.1.Value-added tax 4.27 2.66 2.35 4.3.2. Excises on excise goods 0.33 0.41 0.29 0.4. Taxes on goods imported into the 2.76 2.70 2.75 2.territory of the Russian Federation 4.1. Value-added tax 2.68 2.62 2.67 2.4.2. Excises on excise goods 0.08 0.08 0.08 0.5. Tax on mineral extraction 3.45 4.85 3.78 2.6. Import duties 1.50 1.45 1.47 1.7. Export duties 5.64 8.52 6.73 4.Source: RF Treasury, IET estimates As to the expenditures of the federal budget, relatively high level of them was demonstrated by actually all revenue lines in GDP shares, which have exceeded the indicators of the relevant period of 2008. The items of Social Issues and Social Politics were exceptional:

there were changes by - 0.6 per cent of GDP and -0.4 per cent of GDP, accordingly. The utmost growth in financing occurred on the National Economy (+ 1.9 per cent of GDP) and Intergovernmental Transfers (+ 1.8 per cent of GDP). Let us note, that such a change in the intergovernmental transfers took place mainly due to the growth of transfers to the RF Pension Fund by 1.5 per cent of GDP, as to compared with January-February of the preceding year. Moreover, the increased amount of intergovernmental transfers is due to advanced transfer of financial resources to the regions.

Table BASIC RF BUDGET REVENUES IN 2006 2009 (% VERSUS GDP) February February 2007 2008 TOTAL BUDGET EXPENDITURES 18.39 16.80 17.82 21.Federal issues 2.50 2.64 1.97 2.Including expenditures associated with the 0.44 0.44 0.36 0.servicing of federal and municipal debt National defense 2.56 1.94 2.45 2.National defense and law enforcement 2.05 1.96 1.97 2.National Economy 2.13 1.06 2.41 2.Housing and public utilities 0.91 0.004 0.30 0.Environmental protection 0.03 0.01 0.02 0.Education 0.91 0.52 0.84 0.Culture, cinematography and mass media 0.22 0.16 0.21 0.Health care and sports 0.60 0.37 0.66 0.Social policy 0.66 0.90 0.69 0.Interbudgetary transfers 5.84 7.24 6.30 9.Source: RF Ministry of Finance, IET estimates.

RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES According to Alexey Kudrin, the RF Minister of Finance, the period of growth in budget revenues is completed, and in 2010 and in 2011 the budget revenues should be reduced in nominal terms on a number of functional directions. In the forthcoming years the revenues have to be supported in real terms at a sustained level in many economic branches, but however, public financing programs will have to be reduced by a number of industries. Nevertheless, it is expected that in 2010 and in 2011, the RF budget will be kept up roughly at the same level as in 2009 in nominal terms, and the federal budget deficit would have to be reduced from about 7.4 per cent of GDP to 5 per cent of GDP in 2010.

A significant reduction is expected in the regional budgets revenues. The imbalance of their budgets will account to RUR 800-830 bln. Estimated revenues of the RF regions within the current year are going to decrease by USD 1 trln 100 bln, as compared with the previous year.

The deficit of the regional budgets, amounting to RUR 416 bln by early 2009 will be funded from balances in the accounts of the RF Subjects (in the amount of RUR 112 bln), and the balance of deficit will be funded from the federal budget assets (RUR 300 bln). In particular, the federal budget will provide to the regions budgetary credits, amounting to RUR 150 bln at the rate of 1/3 of the Central Bank refinancing rate1.

It should be particularly noted, that the possibility of using the Reserve Fund assets to cover the budget deficit and the level of revenues retention will be declined in 2010 and 2011. It is expected, that the Reserve Fund will be almost completely depleted in 2010, after it fulfills its mission to support the budget system during the crisis. The information on the cash flow in the Federal Treasury in the Bank of Russia, relating to the amounts of the Reserve Fund in USD for 2009 is presented in Tables 4 and 5.

As to the National Welfare Fund, there are still no plans to use it to finance the current budgets. The Ministry of Finance has made estimates to use it for various scenarios for the pension reform. According to various estimates, the Federal Reserve Fund assets could be entirely spent on maintaining the pension reform of 2010. In this regard, the Ministry of Finance is developing updated estimates, based on the scenario of the reform, approved by the RF Government.

Table THE AGGREGATE AMOUNT OF THE RF FUND OF NATIONAL WELFARE2 AND OF THE RF RESERVE FUND IN 2009 (IN RUR BLN) Date Federal Welfare Fund Reserve Fund 01.01.2009 2 584.49 4 2 991.50 4 869.01.03.2009 2 995.51 4 863.01.04.2009 2 915.21 4 117.Source: RF Ministry of Finance Table RF PURCHASES OF FOREIGN CURRENCY FOR THE FEDERAL BUDGET BALANCE IN 2009 (IN USD) Date Debited from Reserve Fund Account 1 16.03.2009 775 158 774 997 990.1 According to the Head of the Central Bank Sergey Ignatiev, the Central Bank of Russia can reduce the refinancing rate in case of inflation deceleration. Currently, the refinancing rate is significantly higher than in the majority of European countries due to the high inflation rate.

2 The total Reserve Fund and National Welfare Funds assets, denominated in Russian rubles, corresponds to the sum of balances in the Federal Treasury at the RF Central Bank to address the Reserve Fund and Reserve Fund, allocated as the reserve of RF the International Monetary Fund, converted at the official exchange rate of foreign currencies, established by the Central Bank.

BUDGETARY AND TAX POLICY Table 5, contd 1 18.03.2009 781 887 998.19.03.2009 784 420 821.23.03.2009 807 826 945.24.03.2009 810 728 811 478 513.26.03.2009 800 550 304.27.03.2009 806 769 694.31.03.2009 793 804 794.Source: RF Ministry of Finance.

The RF Ministry of Finance has prepared a draft of the main directions of the Russian Federation tax policy plan for 2010 and the planned period of 2011 and 2012. This project does not involve any significant changes in the tax system, but will create conditions for restoring the economic growth in Russia. Currently, the document is provided for coordination to the Ministry of Economic Development and to the Federal Tax Service.

After coordination, it will be submitted for consideration to the Government Commission.

The main directions of tax policy provide a number of measures to improve taxation. Basic trends of the tax policy imply a number of measures for taxation instruments improvement.

It is scheduled to complete depreciation taxation reform in regard to corporate income tax in the nearest years, which means the amendments of the depreciated groups as per functional purpose, rather than according to the period of service. Since the beginning of the current year, the amount of depreciation has already been raised by 10 per cent, up to 30 per cent. Moreover, the Ministry of Finance has proposed to amend the taxation method of income from transactions with securities and with financial instruments on direct REPO transactions and relevant dividends. For the corporate income, in the situation of instability in the financial markets, it is necessary to cut down the period the term, when the price of the securities is valid at the market (from 12 months up to 90 days).

The Ministry of Finance is also in favor of withdrawal from the 2010 the limits of RUR 500 mln for the application of the zero tax rate on income for the taxation of dividends, received by the Russian shareholders, owning over 50 per cent of the company shares, which is paying dividends. The Ministry of Finance intends to support companies, engaged in exploration work, in terms of profit tax. The Ministry is planning to specify a special procedure for the recognition of the cost of natural resource exploration in the Tax Code, which will include the costs of search and evaluation of mineral deposits. That includes, in particular, the construction and elimination costs of the well, if it turned out to be unproductive.

The RF Ministry of Finance intends to continue work on improving the administration of value added tax. The most important innovation will be acceleration of the VAT refund.

It is proposed to accelerate the VAT refund in period from 20 to 30 days under the bank guarantees in order not to create unnecessary barriers to the taxpayers. Moreover, it is necessary to consider the possibility of processing invoices with negative balance for the settlement of applications for tax deductions.

It should be noted, that by the end of the preceding year it was decided to accept a possibility to refund the amount of VAT, paid as an advance payment, which was regarded as an anti-crisis measure. Within the current year, the Ministry of Finance plans to clarify these rules, especially to make execution thereof less burden for the taxpayers.

Herewith, there are no plans to abandon the annual indexation of excise rates in the current situation. Excises on tobacco products will be indexed in quick rates - ad valorem RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES rate (n percentage of value) will grow by 0.5 percentage points per annum. Excises on petroleum products in 2009-2010 will not be indexed, and in 2011 they are going to be differentiated according to the environmental grade of motor fuel. Excises for the rest of excisable goods, including alcohol, will be indexed according the inflation estimates.

Much attention in the main trends of tax policy is given to the revitalization of the work with citizens. In particular, the Ministry of Finance wants to exempt individuals from the mandatory filing of income tax returns (NDFL), if the taxpayers income is tax exempt.

There is no such a rule in the Tax Code at present time, so people still have to file a tax return. Moreover, the simplified procedure of filling returns on NDFL will be supported not only due to the changes in legislation, but also through the simplified and clear instructions for its completion. In addition, the document suggests optimizing the order of individuals taxation in securities transactions. That means the imposition of a tax deduction of up to RUR 1 mln in the sale of securities of Russian emitters, traded on Russian exchange markets, if the securities were owned by the holder for more than a year. In case of an individuals losses from the securities transactions, transfer for the future period is also possible. However, losses and revenues from various types of securities will be varied.

Among the innovations in taxation of mineral resources, there is providing of tax holidays for oil exploration of the new fields in the Sea of Okhotsk and of the Black Sea.

Tax benefits will be granted for a period from ten to 15 years, depending on the type of a license, until the accumulated volume of production at the site reaches 20 mln tons for the Black Sea and 30 mln tons for the Sea of Okhotsk. Besides, the Ministry of Finance favors a tax on additional income from the extraction of hydrocarbons in the new fields. The amount of tax will vary, ranging from 15 per cent to 60 per cent, depending on the costeffectiveness of exploitation of the deposit. However, the administration of this tax would be significantly more complex, than NDPI, as the Ministry of Finance admits.

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