PUTIN WANTS TIGHTER REGULATIONS ON SPECIAL TAX

C O N F I D E N T I A L MOSCOW 001909 SIPDIS E.O. 12958: DECL: 07/03/2018 TAGS: PGOV EAID PHUM PINR KDEM SOCI RS SUBJECT: PUTIN WANTS TIGHTER REGULATIONS ON SPECIAL TAX STATUS FOR GRANTS BY INTERNATIONAL NGOS Classified By: Political Officer Robert Patterson for reason 1.4 (d). ¶1. (SBU) Summary: Russian Premier Putin issued a decree dated June 28 annulling tax-free status for grants issued by most foreign non-governmental organizations (NGOs). Putin swept away seven existing regulations (most dating from 2001-2003) providing international NGOs tax-exempt grant-making status, and charged several ministries to develop new criteria and procedures by October 1 for organizations not included among the 12 intergovernmental organizations exempted in the edict. Heads of some international NGOs and Moscow-based NGOs dependent on foreign assistance to survive told us that while they are concerned by this latest salvo, they are confident that their organizations will be covered by whatever final regulations are issued. Unless the granting organization is included in the new list, the government will tax the grants at the 24 percent business tax rate beginning on January 1, 2009. End Summary. ¶2. (SBU) On June 28, Putin issued an order eliminating an exemption from the 24 percent business tax for grants issued by 89 of the 101 international and intergovernmental NGOs on the current exemption list. Thirty-six of the organizations whose grants will lose their current tax exemption under Putin's decree are U.S-based, including such well-known names as the Ford Foundation, the MacArthur Foundation, the Kennan Institute, the Eurasia Foundation, the Lawrence Livermore Laboratory, Sandia Labs and Los Alamos National Laboratory. Others include current partners with USG-sponsored programs administered by USAID and the State Department. ¶3. (SBU) Putin tasked the Ministry of Finance to work with the Ministries of Education and Science, Culture, Health and Social Development and other "interested federal organs" to develop, by October 1, new criteria and procedures for granting an exemption to grants by foreign organizations. Beginning January 1, 2009, any organization that does not satisfy these new criteria and procedures will lose any current tax exemption they may currently enjoy. ¶4. (C) Ambassador Georgiy Kunadze from the Human Rights Ombudsman's office told us he is studying the order, which he said was written without consulting the Office of the Ombudsman. He thought that there was still time to expand the list of organizations whose grants will not be taxed, but cautioned that this was only his opinion. NGOs Studying the Order; Circling the Wagons -------------- ¶5. (C) Initial reaction from the NGOs affected by Putin's order has been muted, as many are still studying the edict. Dariya Miloslavskaya, Director of the USAID partner International Center for Non-Profit Law, told us that this latest move is yet another tool to subdue NGOs that receive foreign support. She did not, however, see anything immediately fatal in the government's decision since there is some breathing space before October 1. She thought it important, however, to follow the deliberations by the intergovernmental group that is developing the criteria and procedures to ensure that they are transparent and to inform the process and help mitigate any damage. Andrey Kortunov of the New Eurasia Foundation told us the regulation represents a negative trend and that some of the smaller and more poorly-funded organizations will feel the crush of the new tax regime. He did not feel that his organization would suffer greatly because it receives donations instead of grants. Asked to clarify the distinction, he said that donations are simply general support and resources that are not tied to program performance as are grants. Kortunov thought that larger organizations (like IREX, the Ford Foundation and the MacArthur Foundation) will be able to comply with any new regulations or work out an arrangement to soften the blow, or work with the government to resolve it. ¶6. (C) Yelena Panfilova, Executive Director of Transparency International, said that this was a continuation of the process that began with the 2006 amendments to the laws governing NGOs. Her lawyers are examining the order, she said. Panfilova did not think the order would affect their work (Transparency International is registered as a Russian NGO),but she did not know how it might affect future funding. Like Miloslavskaya, Panfilova expected that NGO representatives would attempt to influence the development of the regulations that implement Putin's order. ¶7. (C) Tanya Lokshina of Human Rights Watch hoped to us that organizations would be able to re-define grants as "donations" in order to avoid the 24 percent tax. She noted that in the past some organizations (she specifically mentioned the Soros Fund) have been willing to allow their grants to be called donations in order to avoid taxes. According to Lokshina, other organizations like NED and USAID were less flexible. She thought the number of exempt organizations would certainly increase from the twelve intergovernmental groups currently grandfathered in Putin's edict, but added that through his "demonstrative gesture," Putin had put all foreign organizations -- and all Russian groups with connections to them -- on notice. She too thought the affected organizations would need to "get busy" and begin lobbying their case with contacts in the Presidential Administration and elsewhere in the Russian government. "This was obviously a political move," she concluded. ¶8. (C) Masha Lipman at the Moscow Carnegie Center said that the order had been under preparation for some time and termed the decree a "monetary approach" to a political problem. She was not yet certain how it would affect Carnegie as it does not receive grants, but has money funneled directly to it from the Carnegie Foundation in the United States. She agreed with Lokshina's assertion that the decree was clearly designed to reduce the influence of international organizations in Russia. ¶9. (C) The head of IREX, USAID's largest implementing partner in Russia, believed IREX could qualify under any criteria that will be proposed by October 1; but asked to meet with the Embassy to discuss possible implications of the decree, which indicated to us some degree of uncertainty. Scientific and Humanitarian Assistance May Also Be Affected -------------- -------------- ¶10. (SBU) A number of USG-related grantee organizations in the science, technology, environment and health areas are also looking at the decree closely and determining if it applies to their work here in Russia. The International Science and Technology Center (ISTC) was included on the current list of 101 organizations that enjoyed tax-free grant-making status, but is not one of the 12 organizations listed in Putin's decree. The ISTC liaison officer at the International Department of Rosatom believed that even though ISTC is no longer specifically listed, it would still enjoy tax-free grantmaking status because Russia signed the international agreement that established the ISTC and it provides for tax-free grant-making. In her opinion the existing international agreement would trump a government decree. In addition, she thought the second paragraph of Putin's decree seems to provide a carve-out for groups that already have the status of "intergovernmental' or "intercountry" organizations. The ISTC would presumably qualify as an intergovernmental organization. Contacts at the MFA who work with ISTC were more skeptical that it could still enjoy tax-free status, especially in light of the fact that the ISTC's international agreement had not been ratified by the Duma. ¶11. (SBU) Representatives from the Moscow office of the Civilian Research and Development Foundation told us they will have to work closely with the Ministry of Education and Science to re-qualify for tax-exempt grant-making status once the criteria and procedures have been established. They have already been in touch with the Ministry's International Department to begin work on the issue, but discovered that the Department itself is not certain how the process will work, nor has it appointed a person to liaise with the affected NGOs. ¶12. (SBU) The International Federation of the Red Cross (IFRC) is also looking at the new decree closely and the American Red Cross's U.S. representative there believed it might be able to benefit from the tax-exempt diplomatic status of the International Committee of the Red Cross. If so, the IFRC representative thought the decree would not apply to their activities. He worried that the IFRC might not be able to meet the registration criteria within the three-month window between their establishment on October 1 and the December 31 deadline. ¶13. (C) The World Wildlife Fund currently provides tax-free grants in Russia for wildlife and environmental protection issues. Its representatives said that the organization will try to qualify under the new criteria and procedures when they are published on October 1. Greenpeace representatives did not think the decree would affect its operations because they do not currently provide grants in Russia. Comment -------------- ¶14. (C) The next several months will be crucial for trying to influence the Russian government to draft criteria and procedures that will enable foreign organizations to continue issuing grants to worthy Russian beneficiary partners. We will stress the need for foreign organizations to work together closely to guide the deliberations to a satisfactory conclusion and, through existing USG-funded programs, to provide expert technical advice throughout this process. BEYRLE