Excise Tax Avoidance: case of Russia (УКЛОНЕНИЕ ОТ УПЛАТЫ АКЦИЗОВ В РОССИИ)

Опубликовано: ЭКОНОМИКА И ПРЕДПРИНИМАТЕЛЬСТВО 10 (111), 2019

Текст: M.A. Evnevich, D.V. Ivanova

Евневич Мария Александровна

кандидат экономических наук

доцент, доцент кафедры экономики предприятия

и предпринимательства

Санкт-Петербургский государственный университет

199034, Санкт-Петербург, Университетская наб., д. 7–9

 

Иванова Динара Владимировна

кандидат экономических наук

ассистент кафедры экономики предприятия

и предпринимательства

Санкт-Петербургский государственный университет

199034, Санкт-Петербург, Университетская наб., д. 7–9

 

Evnevich Maria Aleksandrovna

Candidate of Economics (PhD)

Docent, Associate Professor of the Department of Business Economics and Entrepreneurship

St. Petersburg State University

199034, Saint Petersburg, Universitetskaya nab., 7-9

m.evnevich@spbu.ru

 

Ivanova Dinara Vladimirovna

Candidate of Economics (PhD)

Assistant professor of the Department of Business Economics and Entrepreneurship

St. Petersburg State University

199034, Saint Petersburg, Universitetskaya nab., 7-9

d.v.ivanova@spbu.ru

Ключевые слова: акцизы, налоговые поступления, уклонение от налогов, собираемость налогов.

Key words: excise taxes, tax revenues, tax evasion, tax collection.

 

The amount of excise tax revenues is variable from year to year. In 2019, the amount of excise tax collection in Russia decreased by 20%, as compared to the year 2018. The Article deals with the methods of evasion of excise taxes. The Articles considers the countermeasures to be taken against the excise taxes evasion; tobacco and alcohol products are the sample goods to illustrate the countermeasures against the excise taxes evasion and forcing the fraudulent operators out of the market.

According to the data presented by the Federal Tax Service, in January-August 2019 there was a 20% reduction in the collection of excise taxes to the consolidated budget compared to the year 2018, when the revenue amounted to 996,6 billion rubles and 797,5 billion rubles, respectively [7].

The amount of the taxes to be collected depends upon the region. For example, in Tatarstan, the  excise tax revenues amounted to 28,7 billion rubles in 2018, this result demonstrated a decrease by 28,3%, as compared to the year 2017 (i.e. -11,4 billion rubles). [6] The maximum decrease level was determined in terms of the excise tax revenues on alcohol and alcoholic products – amount of the taxes to be collected decreased by 7,3 billion rubles (i.e. – 31,9%). Besides, the early payment of excise taxes in the amount of 2,7 billion rubles at the end of the year 2017 was one of the reasons in this respect. However, the major share of the amount was caused by 3% decrease in retailing sector of alcoholic products.

The decrease in sales of excisable products, on the other hand, can be caused by increasing sales of illegal products. The government set increasingly hard terms, in order to monitor the legal character of sales of the excisable products: we evidence the annual increasing rates for almost all the kinds of excisable products, the authorities implement updated sales control systems, as well as they set minimum and maximum sales prices, etc. Those measures force the retailers to either leave the market or search for new ways of evasion from legal sales.

Let’s consider the countermeasures against the excise taxes evasion on the example of tobacco and alcohol products.

 

TOBACCO PRODUCTS

Tobacco industry is one of the most important sources of tax revenue to the federal budget.

Figure 1 illustrates the amount of excise tax revenues from tobacco products produced in the Russian Federation from January to November in 2017 and 2018. [9]

 
 

Figure 1. Excise tax revenues from tobacco products produced in the Russian Federation

In 2018, the excise tax revenues from tobacco products amounted to 583 billion rubles and the tax revenues from VAT amounted to 113 billion rubles.

Until 2019, there is a valid ban for the sales of tobacco products above the maximum and below the minimum price in the Russian Federation. As of the end of 2019, the minimum retail price limit for tobacco products means the price, below which the goods can’t be sold to the final consumers or retailers, catering and service enterprises, to the individual entrepreneurs as well. The minimum price amounts to 75 % of the maximum price. At the same time, the maximum price is set by the manufacturer - taxpayer per every pack of tobacco products, individually, and per each brand. Information about the maximum retail price should be provided by the taxpayer to the tax authority at its tax domicile (customs authority at the place of registration of excisable goods, either) as per every article of tobacco products.

On November 19, 2019, the State Duma proposed to consider the draft amendments to the Tax Code of the Russian Federation, in order to fix a minimum price for such tobacco products, such as cigarettes and mouthpiece cigarettes. The authors of the Law were a group of deputies: Mr. Sergey Katasonov (the Liberal Democratic Party of Russia), Mr. Alexey Weller, Mr. Ayrat Farrakhov, Mr. Abdulmazhid Magramov and Mr. Yuri Kobzev (Party of United Russia). The main objective of this measure is to prevent the sales of illegal tobacco products. The deputies believe that due to the fact that the market has no minimum price “threshold”, it is actively supplied with tobacco products of illegal origin at unreasonably low prices, and very often they are even lower than the amount of the taxes payable. By fixing a minimum price limit they will allow the consumers, law enforcement authorities and supervisory bodies to identify the illegal products. The date for the Law to enter into force is expected 180 days after its official publication.

The information on the proposed draft of the Law is presented in the electronic database of the lower house of the Russian Parliament. According to the provisions of the Law, they propose to modify a calculation method for maximum and minimum prices for tobacco products. Thus, the maximum price means the retail sales price for the goods, while it will also be set separately as per every brand and should not be lower than the minimum price. As for the minimum price, the following calculation formula will be used: it should consider the minimum excise tax rate per one pack, VAT and tax rates applicable at the time of production and import of the goods in Russian Federation, with its eventual adjusted by multiplying factor equal to 1,4. According to the authors of the Law, in 2019 the minimum price would amount to 86,28 rubles per one pack of tobacco products. At the same time, the average price of a legal cigarette pack amounts to about 115 rubles. The authors of the Law believe that, in case if in 2019 they fixed an equal minimum price, then the share of 97 % of the manufacturers would not be impacted by the related modifications. [1]

 

The representatives of industrial enterprises support this initiative. Mrs. Yana Gus’kova, the Director of the Department of Legal&Corporate Affairs in “BAT Russia” Company (British American Tobacco) declared that the Company completely agreed with this policy, and, moreover, the minimum price should include both the tax component, along with the related production, logistics and transaction costs as well. The implementation of minimum price limits should affect the illegal suppliers only, since bona fide legal manufacturers already take into account all the taxes and other costs involved.

According to Mr. Vasiliy Gruzdev, the Director of Relations with Government in “JTI Russia” Company, the budgetary losses due to the sales of the cigarettes of illegal origin will exceed 100 billion rubles by the end of 2019, that’s why fixing a minimum “threshold” would be a critical tool to resolve this problem.

According to a study performed by the Analytical Agency “Nielsen”, the share of cigarette smuggling and counterfeiting in Russia is growing rapidly [8]. In 2018 their turnover amounted to 8,4%, while in 2019 it reached up to 15,6 %.

The survey performed in 2019, aggregated the data collected not only in the towns, where respondents from the settlements with the population exceeding 50 thousand people participated, but also the respondents from small settlements took part in it. For the purposes of this survey, starting from January to September, 2019, they picked up 15.050 empty cigarette packs on the streets of 225 Russian cities (among them 89 were large cities and 136 small towns).

In the course of the analysis of the pieces gathered, the packs having no inscriptions in Russian or Russian excise label, both the packs with a fake excise label and evidently fake packages were classified as illegal products. The experts who examined the cigarette packs were the owners and representatives of cigarette brands.

As a result of the study, the largest sources of illegal tobacco supply were identified:

  • Belarus        - 36 %
  • Kazakhstan - 8,9 %
  • Armenia       - 8,8 %

Manufacturers of the EAEU countries [Eurasian Economic Union] make up to 55,4 % of the total volume of illegally supplied cigarettes.

The far-abroad countries, such as Iran, Iraq, the United Arab Emirates, Serbia, etc. take the second position in terms of supply of illegal tobacco products. Their share amounts up to 15,7%.

The third position refers to those tobacco products that have been manufactured in Russia, though having a suspicious excise label. Their share amounts to 9,6%.

There are several reasons for the popular character of the products supplied from neighbouring countries; in particular, one of them is the decreasing purchasing capacity, proximity of the border with the EAEU countries and available logistics facilities.

Mrs. Galina Rodina, the Vice - President of the Russian subsidiary of “JTI” Company in terms of corporate relations and communications, believes that if the retail price for one illegal cigarette pack is 40-50 rubles, then its average price in Russia is 115 rubles (62 rubles refer to the items of excise tax and VAT).

Mrs. Ilona Mirtova, the Director in terms of Corporate&Legal affairs at the “Imperial Tobacco” Company declares that the residents of rural areas are more likely to purchase illegal products, because their purchasing capacity is lower than that of residents of megacities.

As for the largest megacities, the share of illegal products is also increasing. In 2018 in Moscow, the volume of illegal products amounted to 4%, while in 2019 it amounted to 7,3%. In 2018 in St. Petersburg, the share of illegal tobacco products amounted to 3% and reached the double amount up to 6% in 2019.

It’s worth reconsidering the issue of increasing the excise tax rate on tobacco products. Table 1, 2 shows the dynamics of rates (according to the provisions of the Article 193 of the Tax Code of the Russian Federation). [4]

 

Table 1                                                                                      

Dynamics in combined excise tax rate on cigarettes and mouthpiece cigarettes

 

 

Cigarettes, mouthpiece cigarettes

Tax rate since January, 01 2015 until December, 31 2021                                                        (date of implementation of a new rate)

January, 01 2015

January, 01 2016

April, 01 2016

January, 01 2017

July, 07 2018

January, 01 2019

January, 01 2020

January, 01 2021

Fixed part of the combined rate (per  1000 pcs.)

960

1200

1 250

1 562

1718

1890

1966

2045

Percentage of the combined rate (as per maximum retail price)

9,0%

9,5%

12%

14,5%

14,5%

14,5%

14,5%

14,5%

In total, fixed and percentage rate should amount at least (per 1000 pcs.) 

1 250

1 600

1 680

2 123

2335

2568

2671

2778

 

 

Table 2

Dynamics in excise tax rates on tobacco, except cigarettes and mouthpiece cigarettes

Tobacco

Tax rate ставка since January, 01 2015 until December, 31 2021                                                         (date of implementation of a new rate)

January, 01 2015

January, 01 2016

April, 01 2016

January, 01 2017

July, 07 2018

January, 01 2019

January, 01 2020

Pipe tobacco, as well as smoking, chewing, sucking, snuff, hookah tobacco, except for raw materials for tobacco products (per 1 kg)

1800

2000

2520

2772

3050

3172

3299

Cigars (per 1 pc.)

128

141

171

188

207

215

244

Cigarillos (cigaritas), bidi, kretek/ clove cigarettes

(per 1000 pcs.)

1920

2112

2428

2671

2938

3055

3177

 

                         

It should be underlined that for the period from 2015 to 2021, excise tax rates will increase by almost 2 times. Due to ongoing increase in the excise rate and the planned implementation of a minimum price limit for tobacco products (i.e. targeting the level of excise taxes and other taxes and payments), they expect the increase in the general pricing level for tobacco products.

In particular, during the period from 2008 to 2014, the minimum excise rate for filter cigarettes increased by more than 7 times, while the specific rate increased by 6,6 times, and the ad valorem rate increased by 3 percentage points. [5] Those measures resulted in increasing tax revenues to the budget of the Russian Federation by 4,88 times - from 65,3 billion rubles in 2008 up to 318,8 billion rubles in 2014.

 

Another violation in terms of sales of tobacco products is the sales of cigarette sets, when they sell a pack of cigarettes together with the related products, for example, with a lighter. This scheme violates the regulation as to the maximum rate limit and is still practiced in public catering establishments – i.e. in cafes and restaurants. At the same time, the sales of cigarettes at a higher price than the maximum level declared by the manufacturer on a pack of cigarettes imposes a fine. However, cigarette sets are still being sold despite the fact that the Federal Law “On Protection of Consumers” of the Russian Federation expressly prohibits when purchasing one product should be followed by purchasing another related item. The enterprise can also be imposed a fine for having committed such a violation.

 

Thus, the current situation on the tobacco market has reached a maximum level. We should accelerate the implementation of new laws, in order to reduce the level of turnover of the illegal goods, for example, by tightening the sanctions for violations due to the sales of tobacco products.

Moreover, obligatory labeling of tobacco products, monitoring and implementation of restrictions on transportation of tobacco goods across the border of the Russian Federation, the creation of uniform requirements to the equipment for tobacco manufacturing, besides, the introduction of regulations for destroying the confiscated goods are required as well. But the most essential measure to prevent the sales of illegal products is fixing the minimum price limits.

                                                

STRONG SPIRITS

Over the recent 10 years, the development of the market of alcoholic products has been realized  under strict regulation by the authorities: [3]

  • 1996 - ban on TV advertising of strong spirits;
  • 2006 - implementation of USAIS [Unified State Automated Information System] for the purpose of monitoring the production of alcohol;
  • 2006 - ban on advertising of alcoholic drinks on radio;
  • 2010 - regulation for a zero ppm for drivers, since 2013, this norm has been increased to 0,35 ppm;
  • 2010 - fixing a temporary restriction on retail sales of alcoholic beverages from 11.00 p.m. until 8.00 a.m. (moreover, in 2012 they implemented a ban on sales of beer at night hours);
  • 2010 - implementation of minimum retail prices for strong spirits;
  • 2011 - ban on sales of alcoholic beverages at gasoline filling stations;
  • 2012 - ban on advertising of any alcoholic beverages on radio and TV;
  • 2016 – coverage by USAIS extended to retail sales of alcohol;
  • regular annual increase in excise rates.

The above-mentioned measures taken in within 2010-2018 resulted in reduction of manufacturing the strong alcoholic beverages by 24%, while the manufacturing of low-alcohol beverages and beer reduced by 84% and 32%, respectively.

 

It’s hard to evaluate the market of alcoholic beverages due to the large amount of unregistered spirits sold. If the legal turnover has been controlled through the USAIS performed by the state authority “Roskontrolregulirovanie” [Russian Control Regulations], then it’s practically impossible to measure the turnover or illegal sale of alcoholic beverages and the use of non-food liquids. However, there are various assessment methods for measuring the illegal market.

• In 2014, the IARD (International Alliance for Responsible Drinking Alcohol) estimated the volume of the illegal alcohol market up to 38%.

• According to a study presented by the Higher School of Economics, in 2015 the volume of the illegal market of alcoholic beverages amounted to 59% of the total volume of the spirits consumed.

• In 2016, Mr. Victor Drobiz, the Director of the Center for Research on Federal and Regional Alcohol Markets, estimated the share of illegal market of alcoholic beverages up to 40%.

• According to estimates presented by the World Health Organization (WHO), the level of illegal alcohol consumption in Russia equals to 3,6 liters for 2016 per capita, i.e. our country hold the third position in Europe.

• According to the data presented by the Ministry of Health, in 2014 - 2017, more than 50% of alcoholic beverages consumed had illegal origin. At the same time, the consumption of home-distilled vodka (samogon), as well as consumption of medicines and veterinary drugs, perfumes and cosmetics instead of alcohol have been also taken into account.

 

Among other things, the consumption of alcoholic beverages has been gradually reducing. In 2003-2016, the consumption of alcoholic beverages decreased by 43%. In 2011 - 2018, the annual consumption of alcoholic beverages decreased from 18 liters up to 9,3 liters of pure alcohol per capita (both legal and illegal types), as Mrs. Veronika Skvortsova, the Minister of Health, reported. Consumption of strong spirits also decreased from 9,9 liters in 2008 up to 5,5 liters per capita in 2017. The decrease in alcohol consumption in general can be caused by the facts that the population purchased more vehicles, as well as due to the promotion of healthy lifestyle, increasing number of fitness centers and entertainment and leisure centers. It’s impossible to estimate the impact of government measures and the natural change in consumers’ behavior.

 

The main obstacle for legalization of the turnover of alcoholic products is a very high income level in this branch of industry, along with the existing corruption of law enforcement and regulatory authorities and the low income of the population, - as declared by Mr. Alexander Nemtsov, the Head of Department of Informatization and System Analysis in Psychiatry at the Moscow Research Institute of Psychiatry.

 

While coming back to the discussion related to the measures aimed at regulation of the legal sales of alcoholic beverages, we should consider the minimum prices for the products.

Since 2009, the Ministry of Finance has been setting the minimum retail prices for alcoholic beverages, in order to minimize the “shadow” manufacturing.

Starting from January 1, 2019, the minimum prices for strong spirits (strength over 28%), including vodka, cognac and brandy, increased. Those new implemented measures cause the average increase in the sales prices for vodka, cognac and brandy by 4,9%. In 2020, they plan to implement another increase in minimum retail prices.

The dynamics in the minimum retail prices for strong spirits per 0,5 liters is illustrated in Figure 2. [10, 11, 12]

 

Fig. 2. Dynamics in the minimum retail price for strong spirits per 0,5 liters

 

It should be noted that the minimum prices for strong alcohol is fixed by the Resolution “On Pricing for purchase (excluding importation), delivery (excluding exportation) and retail sales of alcoholic beverages which are over 28 percent strong”. The price calculation is carried out, considering the costs of raw materials, production costs, depreciation of equipment and other components of production cost, as well as production profitability, minimum wholesale and retail markups, taxation, inflation as well.

                                     

At the same time, consumer prices are also increasing. For example, the price of 1 liter of vodka increased from 583 rubles in 2016 up to 604,3 rubles in 2018 (see Fig. 3).

 

 

Fig. 3. Consumer prices for vodka in 2016 – 2018, rub./ liter

 

In October 2019, WHO reported a decrease in mortality in the Russian Federation due to the decreasing consumption of alcoholic beverages [2].

Government has taken such measures as follow:

• regular annual increase in excise taxes;

• setting minimum market prices;

• implementation of tracking systems for the manufactured goods;

• sales of alcoholic beverages online.

Those measures didn’t only stimulated the legal sales of alcoholic products and reduced the turnover of counterfeit goods, thereby increasing the collection of excise taxes, but also had a positive social impact.

 

CONCLUSION

The amount and character of the damage through taxation becomes rather more extensive. The above-mentioned examples of dealing with alcohol and tobacco products allow us to see that the share of smuggling and counterfeiting has been growing as well. At the same time, the measure taken by the authorities are being improved through strengthening the regulations of business activities, in order to force the fraudulent operators out of the market, the authorities apply digital technologies for tracking the sales of goods, setting minimum and maximum prices for wholesale and retail operators, regular increase in excise taxes, etc.

It could not be denied that, due to such restrictions, we evidence the actual effect; this fact has been confirmed by the statistics data on sales volumes and the considerations of the business representatives. However, new excise tax evasion schemes are emerging, their scope is hard to assess. Thus, it’s necessary to arrange and provide the proper conditions, in order to prevent any opportunity to deal with any kind of illegal activities.

 

REFERENCES

1. State Duma proposed to set the unifies minimum price for cigarettes. 1/911/2019 URL: https://ria.ru/20191119/1561131392.html

2. Starting from 2020, minimum prices for vodka and cognac will increase in Russia. 21.10.2019. URL: https://www.dp.ru/a/2019/10/21/V_Rossii_s_2020_goda_vira

3. Galcheva A., Levinskaya A. Authorities considered their goals to apply countermeasure against the turnover of illegal alcoholic products to be unachievable. 17/10/2019. URL: https://www.rbc.ru/economics/17/10/2019/5da5baff9a7947b9dbfcb123

4. Tax Code of the Russian Federation (second clause) dd. 05.08.2000 N 117-FZ (as amended on 29/09/2019) (as amended effective of 01/11/2019)

5. Guidelines in Taxation Policy of the Russian Federation for 2016 and the planning period for the years 2017 and 2018. URL: http://www.consultant.ru/document/cons_doc_LAW_183748/1f0d06e11d01fb497107328329fc0d54584e8d17/

6. Tax revenue in 2018 amounted to 772,5 billion rubles (Republic of Tatarstan). 28/01/2019. URL: https://www.nalog.ru/rn16/news/activities_fts/8330018/

7. Revenues as per the taxation type to the consolidated budget of the Russian Federation for January-August of 2018-2019. Tax Analytics presented by the Federal Tax Service. URL: https://analytic.nalog.ru/portal/index.ru-RU.htm

8. Romanova T. In Russia, people started to buy more illegal cigarettes. 11/27/2019. URL: https://www.vedomosti.ru/business/articles/2019/11/27/817321-sigaret

9. Market of alcoholic and tobacco products in 2018. Analytical Center at the Office of the Government of the Russian Federation. URL: http://ac.gov.ru/files/publication/a/21614.pdf

10. Resolution of the Ministry of Finance of the Russian Federation dd. 11/05/2016 № 58n “On Pricing for purchase (excluding importation), delivery (excluding exportation) and retail sales of alcoholic beverages which are over 28 percent strong” (registered on 31/05/2016 № 42365). URL: http://publication.pravo.gov.ru/Document/View/0001201606020046

11. Resolution of the Ministry of Finance of the Russian Federation dated December 14, 2018 № 267n “On Amendments to the Resolution of the Ministry of Finance of the Russian Federation dd. 11/05/ 2016 № 58n “On Pricing for purchase (excluding importation), delivery (excluding exportation) and retail sales of alcoholic beverages which are over 28 percent strong” (registered  on 20/12/2018 № 53080). URL: http://publication.pravo.gov.ru/Document/View/0001201812210031

12. Draft of Resolution of the Ministry of Finance of the Russian Federation "On setting prices, at least at which purchases (excluding imports), deliveries (excluding exports) and retail sale of alcohol products with a strength of over 28 percent are held, and recognition of the order of the Ministry of Finance of Russia of May 11 2016 № 58n “On Pricing for purchase (excluding importation), delivery (excluding exportation) and retail sales of alcoholic beverages which are over 28 percent strong”  (prepared by the Ministry of Finance of the Russian Federation on 21.10.2019).

URL: https://www.garant.ru/products/ipo/prime/doc/56710876/