BELARUS NEWS AND ANALYSIS

DATE:

18/11/2008

Doing business: State retreats from direct intervention

By Geoffrey Smith

"I hate this regime," says the louche-looking Ivan, with a draw on a cigarette during one of his breaks from the automated roulette wheel in the hotel casino. "But, I have to say, things are getting better. Five years ago, you could do nothing at all, but now you can do some things, at least."

It is a common refrain. Life is improving for private business in Belarus, albeit from a position in which arbitrary action was the hallmark of economic policy. Although much still remains to be done, the state is retreating from direct intervention in the economy by streamlining regulation and lightening the tax burden. The country rose 30 places in this year's World Bank survey on the ease of doing business, but still ranks only 85th overall - above Russia and Ukraine, but below Kenya and Colombia.

For all the government's intentions to liberalise the economy, all the rights and privileges accorded investors are still guaranteed only by a constitution that gives primacy to presidential decrees over laws, effectively exposing all private investment to the changing moods of President Alexander Lukashenko.

Taxation remains high by regional standards, with general government revenue at over 45 per cent of GDP, compared with 30.5 per cent for Ukraine and 20 per cent for Russia. And regulation remains unpredictable: a crude attempt to cap the prices of imported consumer goods in the summer led the capital's florists, among others, to shut up shop. The government backed down, but retail mark-ups on some imports are still limited to 30 per cent by a watered-down version of the decree.

Overall, says the deputy finance minister, Vladimir Amarin, next year's budget will reduce the tax burden by 1.3 per cent of gross domestic product, and future budgets will shave a further 2.4 per cent of GDP off it.

The nationwide turnover tax, which last year was 3.4 per cent, will be phased out entirely by 2010, while local sales taxes are, from 2009, to be levied at a flat 5 per cent rate from a 5-15 per cent scale. Personal income tax, hitherto levied according to a progressive scale of 9-35 per cent, will be a flat 12 per cent. Corporate income tax will remain fixed at 24 per cent and valued-added tax at 18 per cent, both harmonised with Russia, with whom Belarus has single-market arrangements.

"The tax burden is now lighter and the system is simpler" says Dmitry Duchitsky, chief executive of lingerie maker Milavitsa, a major beneficiary of the planned reforms.

In addition, the government has extended a range of tax and regulatory exemptions to companies in one of six Free Economic Zones (FEZ) - one for each administrative region - and especially for a new high-technology park in Minsk that it hopes will help Belarus get more out of its scientific and educational inheritance (the country boasts 22,000 information technology graduates a year, according to government data). Corporate profit tax and VAT are charged at half the national rate, there are duty exemptions for imported and exported goods, and a seven-year guarantee on tax stability.

The FEZs initiative shows that "where there is a good project, and where the state is needed, there will be support", gushes Vyacheslav Donvar, chief executive of freight forwarding company Belintertrans, which aims to build logistics centres in most of them.

Oleg Zinoviev, head of the newly formed National Investment Agency, says the FEZs are one of three signal achievements in overhauling the conditions for doing business, along with the publication of a list of companies where the government aims to offer operating concessions and the abolition of the infamous golden share law, which allowed the state to keep control of privatised companies.

There are also extensive new tax exemptions and privileges for companies operating in rural areas and towns with fewer than 50,000 inhabitants, an initiative aimed at preventing the destruction of local light industry that has blighted Ukraine and Russia.

Progress, albeit spotty, has also been visible in the sphere of regulation. According to the World Bank, Belarus has done best in the areas of registering property and enforcing contracts, although it also scores well on hiring workers and getting construction permits. Slowly, businesses are developing an ability to defend their interests against the state. Mr Donvar cites statistics showing that more than 60 per cent of economic court rulings in tax cases now go against the tax inspectorate.

However, partners at Verdict, a Minsk legal firm, warn against reading too much into this, noting that other regulatory bodies - notably the State Monitoring Committee - are much harder to defend against. Even bona fide errors in invoices can be punished, says a partner at one Minsk law firm, requesting anonymity. He is still trying to recover $500,000 in property confiscated from a client four years ago.

Source:

http://www.ft.com/cms/s/0/4de9bab2-b431-11dd-8e35-0000779fd18c.html

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