The great purge


Nobody likes paying tax and many people don't. This is the grudging truth that comes from the size and sophistication the so-called tax planning industry has assumed in the last fifty or so years. How we don’t pay tax is what makes us different: it says more about us than the way we dress, the food we eat, or the university we attended.

There is a general consensus that some methods are perfectly legal – an arrangement of one’s affairs in such a way that the taxman wouldn’t be able to object even if he grasped the whole plot. More often, one can’t be so sure; he hopes that they won’t know. Though they can see the general picture, there is an element that they won’t, hopefully, find out: who is behind a trust and who is a real, beneficial, owner of a company. Yet, by and large, the scheme looks reasonable and reassuringly complex.

Sometimes, however, the trick is a blatant and manifest crime. Those who pay a sham company for some mythical services in order to receive payment back in cash, untaxed and unaccountable - obnalichka is the term they use – know that. So are those who forge export invoices in order not to pay customs duties, or the ones who practise the carousel fraud, when a swindler claims an illegal VAT refund.

All scams have one thing in common: they require a sham entity to back on a hoaxer’s track and make it difficult for the tax hunter to connect a certain financial flow with a particular individual.

There are no secrecy laws in Russia. Information about the owners or directors of a company is open. It is striking, then, how common the shams are: up to 90% of domestic companies use, in differing ways, structures that do not pay tax, do not conduct genuine commerce but effect an entrance to the economic netherworld.

These companies are registered in the name of alcoholics, homeless, or fools who are ready to give their names for a little cash. They’ve got nothing to risk, they think; their freedom or life is what they stake. Igor’s body was found in a forest near Kaluga. By that time he, a 24 year old student, was a director of 36 companies with overall turnover of $600m.

In a country where cash is king, money laundering is preposterous

At some point it seems to be about cleaning up criminal money. Russia tries to deal with it: it is a member to FATF (The Financial Action Task Force), the international watchdog fighting money-laundering. The idea is to prevent criminal money from entering the banking system and the results are starting to show. It is now somewhat problematic to deposit a suitcase of cash without saying anything about its origin.

But you don’t need to bother: in Russia you can buy almost anything – a car, a house, or a plant – for cash. In a country where cash is king, money laundering is preposterous.

Some of the wealthiest people here, if you look at their documents and not their luxury houses, are middle class. Most state officials - by law they must now make all their property and incomes public - are poor. Vladimir Putin, for instance, owns a tiny flat, two old cars, vintage 1960 and 1965, and a piece of land. His wife has nothing.

With years the griping about sham structures among taxmen was getting louder. They get swamped under the flood of one-day companies. Shams, they say, are not a problem; it is their number that makes the taxman’s life difficult.

Russia, however, does not abound in companies. Compared with countries where most entities are involved in some form of genuine commercial activity – which is far from the case in tax havens - the number is not that large: it is twice as much as in Germany (and that can probably be explained by the high minimum capital for German companies) but less than in France or Sweden. There are plenty of taxmen, though. In Russia, there are less than 18 legal entities per one tax inspector, though in Britain the number goes up to 28.

What is striking is the number of companies removed from the register by the taxmen: every fourth company, over a million, has been struck out.

Apparently, sham companies are taken seriously; they are seen as a disease not a symptom. The President’s Council for Codification and Improvement of Civil Legislation has approved recommendations on the reform of company law. It has been suggested that the minimum capital of domestic entities should be raised to 1m roubles or $34,000.

If the proposal becomes law the contributions the founders will have to make to set up a company will be larger than in Germany, twice as much as in Sweden, and nearly three times as in France.

For small business the reform would essentially mean the abolition of limited liability and a return to the nineteenth century - before a corporation was introduced into Russian law - when all the personal assets of a trader were at risk.

At times sham companies seem like the mythical many-headed dragon which Ivan the Prince had to kill: once he had cut off one head, two more appeared. Yet, to tell the truth, the authorities have won several important battles. Payment to a one-day entity can trigger an in-depth investigation and the company called to account.

Most importantly, however, is that Russian society has reached a stage when it does not need sham structures: for companies these blackholes are a hurdle to raising capital; for banks, a potential drain in the borrower’s assets; and for lawyers and tax advisers, a professional dead-end. The problem is that for scammers it is still a very, very lucrative business.


March 29, 2010
text: E. Istomina
picture: NatalyArt -



When fewer taxpayers mean bigger revenues