Kommersant reports that Russian Federal Tax Service wants to introduce criminal penalties for companies that do not file taxes. The problem, of course, is that this will also apply to companies that go bankrupt.
The tax service acknowledges that its position contradicts that of the Supreme Court of Arbitration, which ruled last December 20 that the service should liquidate dead companies with administrative procedures. The tax service objects, however, that that decision leaves the door open to a new generation of tax schemes.
The Russian economy has to deal with many instances of “firms-for-a-day” established to complete business transactions after which they perish without paying taxes. Such firms are also used to launder money. From this perspective, the measure is useful in trying to address illegal activities.
Yet, if it equally applies to legitimate firms that just don’t make it – then it only serves as a penalty on entrepreneurship. Where is the incentive to start a business, if as a result of failure you face jail time not ruined credit history or an opportunity to restructure? If you can go to jail for business failure, where is the incentive to take risk and promote new ideas?
The Russian case underscores the challenges in implementing reforms in emerging markets and that good intentions may also have unintended consequences. The problem of dummy firms is of a significant importance for the Russian economy, but should it be addressed at the expense of legitimate business?
Published Date: January 24, 2007