Why a tax was introduced on deposit income above RUB 1 million

The decision to tax income on deposits above RUB 1 million has to be seen in the context of a set of changes in tax and currency regulation.

One result of the large-scale deoffshorisation programme, launched in order to bring capital back to Russia, appears to be a refusal to use foreign jurisdictions, which had attracted people by the possibility of applying lower tax rates, and, as a consequence, the repatriation of income received and a redirection of cash flows to the domestic market.

The growth of the money supply inside Russia is also furthered by BEPS, a set of measures against erosion of the tax base initiated by the OECD across the world. Under this programme, many of our compatriots run into problems not only with using the preferences granted by double tax treaties, but also with keeping funds placed on deposit abroad.

This is because banks are now obliged to look into the beneficial owners of capital and the sources from which it was formed. If the slightest doubt arises, the bank stops servicing the client, which means that the depositor has to withdraw the funds or move them.

- says Sergei Pivovarchik, managing partner of Consul Group.

The changes set out above, which are already an accomplished fact, objectively create the conditions for substantial capital to return to Russia, or to arise there. That capital may be used in one of the following ways:

• investment (including reinvestment in one's own business);
• an increase in demand and, accordingly, a stimulus to supply;
• placement on deposit.

For any economy the first two ways are positive, stimulating factors, whereas the accumulation of substantial sums on deposit not only does no good in any broad sense but also feeds inflation. In those circumstances, taxing excessive amounts placed on deposit looks entirely logical: a decision aimed at developing the economy, and a component of the deoffshorisation programme, which began to be carried out quite some time ago. The decision to tax income from deposits was therefore not taken now, and certainly not under the influence of the coronavirus. It is a long-planned and, importantly, necessary measure to stimulate the economy.

In our view, in the light of what is set out above, it should be recognised that the main aim is not extra revenue for the state budget, but encouraging people to invest in the development of business, which, by multiplying that investment in the course of business activity, will in its turn produce a substantial growth in taxes. By investment we mean both reinvestment in one's own business and investment in the securities markets, including individual investment accounts (IIS). Further confirmation of this rationale for taxing income from deposits is the reliefs and preferences granted to private investors.

- says Sergei Pivovarchik.

It is also worth noting that the bill as it now stands (which may of course still change in the course of the readings) taxes not the whole of the income, but only amounts that exceed the return at the key rate. For example, at a key rate of 6% and a deposit of RUB 1 million, personal income tax will be charged on amounts above RUB 60,000 (6% of the deposit).

In those circumstances there is no basis for speaking of substantial receipts from the deposits of wide sections of the public. Above all, the changes are aimed at encouraging the wealthiest citizens to move their savings out of banks and into real business.

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