July 8 – July 14, 2013

Investment ‘tithe’

The situation has not changed
Investment ‘tithe’

JSC Krasny pischevik will list 8% of the net profit to the “Belgospischeprom” investment fund.

The government intends to allow the industry concerns to set up own investment funds, delegating to them the right to collect share of enterprises’ profits. Officials will have additional resources and new opportunities to interfere with enterprises – concern members’ management. As a result, resources will be distributed from more successful to less successful businesses.

In 2013 it is planned to allocate BYR 6.1 trillion (USD 7 billion) for industrial complex modernization alone. In Q1 industry had a net profit BYR 9 trillion, and three leading industries accounted for almost half of the net profit. Two industries are generally unprofitable. The uneven distribution of financial resources among enterprises against the need to modernize industry as a whole resulted in implementation of an idea to concentrate financial resources across industries and subsequently redistribute resources between the most important projects.

The following mechanism is proposed. The Council of Ministers’ decision will allow concerns to create their own funds. Companies – concern members will be required to list 5 to 10% of the net profit made during the reporting period (by quarterly). The money would be collected and sent to the most important modernization projects within the group. De facto, concern’s mini-budgets will be created – revenues will be generated from revenues of the subordinate enterprises, and civil servants responsible for modernization will be deciding where to spend these funds.

As a result, resources will be distributed from more successful to less successful businesses. Loss-making enterprises will be unable to pay this ‘tax’, because they would not have net profit. The decisions about redistribution of resources will be made by state officials, implying they will have additional leverage on the subordinate enterprises. Proceeds expenditure will also be decided by industry officials and other things being equal, the choice will be made in favour of the ‘proper’ business managers. In a sense, profitable businesses will lose some motivation for success due to partial deductions from their profits. Moreover, potentially, the more successful enterprise is the larger tax on profits it will pay.

Thus, a new ineffective mechanism of proceeds redistribution among subordinate enterprises has been created. The primary beneficiaries from this scheme would be inefficient and loss-making enterprises. Simultaneously, officials will receive an additional lever of pressure on businesses that will strengthen their lobbying power.

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