Why Did the Consolidated Tax Regime Cause Massive Losses in Tax Revenue in Russia?

In Russia, the consolidated tax regime was introduced in 2012 but in 2019 the decision was made to abolish it from 2023. The initial reform purported to discourage companies from using transfer pricing for domestic transactions between companies of one group and to ensure a more just allocation of the corporate income tax across Russian regions. In practice, however, the government’s shortfall in tax revenue reached two billion US dollars in certain years or 0.15% of Russia’s GDP. Our analysis has shown that the publicly available data are, unfortunately, insufficient for assessing the success of this reform, in particular, whether the two above-mentioned goals were achieved. However, we can focus on the role the following two factors played in the budgetary losses. The first such factor is that profits and losses of group members can be consolidated within one accounting (fiscal) period. The second factor is that consolidated taxpayer groups shift their tax bases to regions with lower tax rates (in some cases, regions established tax preferences explicitly for the purpose of attracting members of these groups). These loopholes reveal the deficiencies of the Russian consolidation model: for example, the ‘everybody or nobody’ principle is not applied in Russia and consolidated taxpayer groups are allowed to form the perimeter of tax consolidation themselves. In this paper, statistical tax reporting data are used to estimate the total amount of the shortfall in tax revenue caused by the regional tax preferences granted to members of consolidated taxpayer groups. In some cases, as our analysis of regional tax legislation shows, these tax preferences were intended to ‘steal’ the tax base from other regions or at least to prevent the regions’ own tax bases from being ‘stolen’ by rivals. Judging by the total figures, regional tax competition had a negative influence on budgetary revenues. This, however, was not the main factor as the shortfall in revenue was mostly caused by the possibility of immediate offset of losses within consolidated taxpayer groups.