A Special Tax Regime for Russia’s Far East and Siberia

Sept. 24 – The Kremlin may consider a special tax regime for economic partners in the Far East and Siberia. The idea to bestow tax rebates on businesses across the region follows the Asia-Pacific Economic Cooperation forum, hosted by Russia in Vladivostok earlier this month.

Both President Vladimir Putin and Prime Minister Dmitry Medvedev have now said they were toying with the thought of slashing the tax burden in the easternmost provinces to spur private enterprise, investment appeal and potential for trade with some of the world’s fastest-growing economies, such as China and Indonesia.

“We need to gather our courage and create different tax and property regimes, which will be a tricky thing and cause arguments within government, and frankly speaking between the regions at different levels,” Medvedev was quoted by Russia’s state-run news agency RIA Novosti as saying.

Companies that set up a new operation to pull natural resources from under the ground in the Far East could enjoy a zero rate on the mineral extraction tax, Putin said. A similar fiscal benefit is in place for eastern Siberia, he added.

Earlier, Far East Development Minister Viktor Ishayev proposed sweeping tax holidays for new investments, both foreign and domestic. He named profit, property and value-added taxes as the targets.

“The geographic remoteness of the Far East from the country’s western regions breeds extremely high outlays in all sectors,” he said.

Some of the country’s biggest companies such as steel and coal producer Mechel, natural gas giant Gazprom, and foreign investors like Canadian Kinross Gold which operate in the Far East could benefit from any future tax incentives.

More than 85 percent of deliveries of liquefied natural gas from Gazprom were to Asia-Pacific countries in 2011. This week, Gazprom said it aims to invest more than US$14 billion on developments in the Sakhalin Region north of Japan.

Russia has recently pumped US$21 billion into its eastern seaboard to attract investors, tourists and gamblers from Asia. Vladivostok, a city of 600,000, has received a makeover, with a new airport, highway intersections, and the US$1 million Russky Island Bridge.

Vladivostok, whose name translates from Russian as ‘Ruler of the East,’ was founded as a window to the Asian world when 90 years ago, tsarist Russia completed a 9,300 kilometer (5,800-mile) rail line to the city in record time. Later, Soviet leader Nikita Khrushchev was inspired to develop the city by a visit to San Francisco, another Pacific city on a bay, in 1959.

Although, city residents say inflated contracts were won by insiders and the money would have been better spent on social services and housing.