‘Who are we taking pity on?’

On 28 June, the State Duma adopted (in the first reading) a bill introducing a one-time “superprofits” tax. It has been discussed in the media since the start of 2023 and was referred to as “windfall tax” or “emergency tax”.

Companies will have to pay 10% of the excess pre-tax profit for 2021-2022 over the same indicator for 2018-2019.

The new law does not apply to companies with an average profit below 1 billion rubles (€10.2 million) in 2021 and 2022, as well as oil, gas, and agricultural enterprises. The current laws only allow the introduction of a new tax next year: the payment deadline is set for 28 January 2024.

The bill caused some controversy in the Duma, which does not happen often these days. During the discussion of the bill, three parties — the Communist Party, the Just Russia party, and the New People party — spoke out against it. The LDPR party and the ruling United Russia party backed the bill.

Alexander Dyomin, a New People MP, stated that the new tax will hurt the companies who had to rebuild logistics and “lose sleep” during the pandemic and the “special operation”. Meanwhile, who “exploited market conditions and rising prices for raw materials” will be exempt from it.

Yevgeny Bessonov, another MP, also expressed concern that large industrial enterprises that perform “tasks set by the president” will become subject to the tax.

Andrey Makarov, an MP with the ruling United Russia party, was among those who backed the bill. “Who are we taking pity on?” he said, adding that the companies that would be taxed spent over 2 trillion rubles (€20 billion) on dividends, not investments. He also warned fellow MPs he would reveal what business each of them was linked with.

This resulted in only 28 MPs going against the bill.

Who’s going to pay the most

The Finance Ministry is planning on collecting 300 billion rubles with the discount applied. According to the agency’s forecast, out of the top 50 future payers, the largest share will be in the mining industry (20%), mineral fertiliser production (19%) and metallurgy (12%).

According to Denis Sverchkov, General Director of Green Light Management, the top 10 taxpayers will include Sberbank (20.4 billion rubles), Norilsk Nickel (18.3 billion), PhosAgro (12.1 billion), RusAl (10.4 billion), Severstal (9.5 billion), MMK (9.2 billion), VTB (6.8 billion), Polyus (6.3 billion), and PIK (5.3 billion).

This being said, RusAgro will pay the biggest share of 22% while the rest will pay less than 10%. The calculations for some companies are based on forecasted profits rather than actual ones since not all companies have published their financial statements yet.

In total, the Finance Ministry is going to tax 2,500 companies. The chairman of the Delovaya Rossiya business association, billionaire Alexey Repik, said in an interview with Vedomosti that initially the tax was intended for the 20-40 largest companies. But then, he says, the companies of the “magic valley of death” were added to the list: those have neither discounts for medium- and small-size businesses nor any access to the top officials.

Interestingly enough, Deputy PM Andrey Belousov and Finance Minister Anton Siluanov claim that the businesses actually came up with the one-time tax idea on their own. “They realise that they have had colossal profits in 2021 and 2022. Those are enormous profits. More than the state budget has. So, they said: ‘Guys, don’t raise the taxes, we can just chip in together and pay the money,” Belousov said.

In many respects, this was due to the growth of oil, gas and coal companies, since the prices for raw materials rose as the country recovered from the pandemic and then started a war, economist Alexandra Suslina-Osmolovskaya tells Novaya-Europe. However, if we compare 2022 to 2021, the profits decreased by 12.6%.

Since the instalment amount will be based on the pre-tax profit, companies at a loss (without net profit), for example, VTB and Polymetal, will also need to pay. Repik notes that the companies whose profits decreased twofold or threefold in 2022 will have to pay a large fee.

Oil and gas companies that actually earned excess profits did not fall under this tax, because the current legislation already allows the state to take “surplus profits” from them, Osmolovskaya explains. “Their excess profits are collected by the treasury through severance taxes rather than the income tax,” she says.

In addition, Gazprom was ordered to pay an additional 1.8 trillion of severance tax in 2022 over a three year term, and the state plans to cut compensations to the oil companies for lower fuel prices in the domestic market in half. This will save the budget several hundred billion more each year, but may lead to an increase in the price of gasoline by 8-10%.

“Other sectors rarely had excess profits, so the usual income tax was enough for them to pay. But now they also have excess profits, and there is no procedure for the state to collect it. That’s why they’re trying to introduce it retrospectively,” Osmolovskaya says.

300 billion worth of additional taxes is a lot of money, she believes. “Especially when this tax is being imposed retrospectively. They might have spent these profits already. That’s a lot of money, but large companies will be able to handle this. Of course, any additional tax burden reduces investment potential. But the government’s current priority is mobilising additional revenues rather than stimulating economic growth,” Osmolovskaya says.

Will there be a new tax hike?

The deficit of Russia’s budget amounted to 3.4 trillion rubles for the first five months of 2023, which is already 500 million more than was planned for the entire year. Reducing the deficit was one of the key topics of discussion among top economic officials at the St. Petersburg Economic Forum.

Vladimir Putin’s economic aide Maxim Oreshkin and Economic Development Minister Maxim Reshetnikov called for spending cuts. “We’re going to lose more income from the slowdown of the economy than we might hypothetically gain from raising taxes for businesses,” Oreshkin said.

At the same time, Elvira Nabiullina, the Chairwoman of the Central Bank, mentioned a potential tax hike: “The worst case is to cut [expenditures] in proportion to everyone, we won’t achieve any results at all this way… [but if we don’t raise taxes], then we’ll need to cut expenses. We’ll need to pick one of these options, there is no other way.”

German Gref, the CEO of Sberbank, also says businesses expect an increase in the tax burden due to rising costs.

The key authority in the issue of raising taxes, the Ministry of Finance, has not yet produced a definite forecast. “While we have a budget deficit, tax policy becomes a derivative of budget policy. The budget for the next three years is being actively formed right now: the parameters of the deficit and the sources of its financing are being determined. Whether tax changes will be required depends directly on how big the budget deficit is and what sources of its financing will be chosen. So, there is no way to be certain right now,” Alexey Sazanov, Deputy Finance Minister, says.

He also mentioned that the “one-time fee on superprofits” might be declared more than once.

One can only hope that the government will not go for a new tax increase, Osmolovskaya says. “The economy is exhausted enough as it is. It’s hard for the companies, they already have so many problems: they are losing personnel due to the mobilisation and because people are leaving the country, and they need to rearrange their supply chains and replace old imports. So, raising taxes will hit them, which can be critical. Raising individual taxes, such as VAT, is also a dangerous idea. People have very little patience left,” the economist says.