Kremlin aide calls for tax cut compromise

By Dmitry Zhdannikov and Anastasia Onegina

MOSCOW (Reuters) - Russia should cut taxes, including in the oil sector, and stop tightening monetary policy to support economic growth, a Kremlin aide said on Tuesday amid a heated debate on tax reform with the Finance Ministry.

Arkady Dvorkovich said oil output in Russia may continue to fall if taxes are not cut in deep contrast to an earlier comment by Finance Minister Alexei Kudrin, who said oil firms were exaggerating their problems.

"His (Kudrin) opinion is that taxes should rise. I think it is absolutely unacceptable," Dvorkovich said at the Reuters Russia Investment Summit.

"We think we could afford a certain reduction in tax," he said at the event, held at the Reuters office in Moscow. He added that a tax cut could encourage mid-sized and small businesses to come out of the shadows and pay taxes, helping to raise budget revenues.

Kudrin told Reuters on Tuesday a final decision on tax policies would be taken in September.

The Economy Ministry proposes cutting value added tax (VAT) or corporate profit tax to support economic growth, but Kudrin, Russia's main fiscal hawk, argues the economy has been growing too fast in the past years.

"I think a compromise solution would be to cut the profit tax or the value added tax and raise corporate pension and health insurance contributions instead," said Dvorkovich.

Those changes could come into force from 2010, while the oil sector could enjoy some tax breaks from 2011, he added.

NO GROWTH WITHOUT OIL TAX CUT

Dvorkovich said he still thought the government should cut the mineral extraction tax to revive production growth and raise simultaneously export duties on heavy oil products such as fuel oil to encourage companies to invest more in refineries.

Oil firms have said they want tax cuts of as much as 400-500 billion roubles. Dvorkovich said such a figure could be realistic if it was compensated for by higher growth rates and therefore higher budget revenue over a period of eight to 10 years.

"It is quite possible that if taxes are not cut we won't see the growth in output which is forecast by the Economy Ministry, which the Finance Ministry is using in its budget strategy and instead of having a 1-2 percent increase we will see a 1-2 percent drop," he said.

"And then we will need to revise the forecast and understand how big our losses are. I'm afraid they will be even bigger than if we cut taxes and get a chance of maintaining growth".

Russia looks set to miss its inflation target by a wide margin for a second consecutive year as CPI is currently running at 15 percent on an annualized basis.

Dvorkovich said the decline in money supply this year would lead to lower inflation closer to the second quarter of 2009.  Continued...