11.01.10

Changes In Russian Tax Legislation For 2010
Yulia Mazur, Partner and Head of Accounting, Alinga Consulting Group

The main changes to the tax legislation that came into effect January 1, 2010 concern the Simplified Tax System (STS) and the Unified Social Tax (UST). It might seem that legislators have made some radical changes to UST. However, in essence, the changes are mostly administrative: social taxes and reporting for them will now be submitted directly to the Pension Fund (PF), the Social Insurance Fund (SIF), the Federal Fund of Mandatory Health Insurance (FFMHI) and the Territorial Fund of Mandatory Health Insurance (TFMHI), instead of to the tax authorities and redistributed from there.

Essentially, a payroll tax has been changed to an insurance plan. In other words, we have paid "tax" up to 2010 (a required payment, appropriated irreversibly and without return by the government), but will, as of, 2010 pay "insurance premiums" where the government acts as an insurance company, the employing organizations are the insured, and old age and illness are insurable events.

Structure and Rates

Specifically, the PF will supervise payments to pension insurance and medical insurance, while the SIF will supervise social insurance collections. Taxpayers will also be required to inform these agencies about opening/closing bank accounts (within 7 days), about the opening/closing of separate subdivisions (within one month), about the reorganization/liquidation of the fund-paying enterprise or about the ceasing of activity of the individual entrepreneur (within 3 days) to assist them in maintaining accurate records and making accurate assessments.

All field and desk audits for these payments will be carried out by the PF and SIF. It has been proposed that they coordinate field audits with each other ahead of time, so that the PF and the SIF will both audit the taxpayer at the same time.

Before the introduction of Chapter 24 of the Tax Code in 2001, accountants similarly composed several reports and submitted them to several addresses. Chapter 24 made life a little easier. For example, accounting for the UST was made uniform, and only two reports were submitted to one address for that tax. Now accountants are again placed in a position where they must submit multiple reports (three) to two addresses. However, as reports may still be sent via post as well as electronically, this should not be a large inconvenience.

Concerning the tax burden, legislators have replaced the regressive scale with a flat rate and a ceiling. A rate of 26% is fixed for each employee with wages less than 415,000 rubles/year. No taxes will be calculated for employees who are paid more than that amount. However, this ceiling will change beginning in 2011, as it will be indexed to inflation.  While the amount of each contribution may change for the better or worse depending on each taxpayer's individual situation, reporting and calculating the contribution will be  easier than it is with the current regressive scale, helping employers to avoid mistakes..

In 2010, the rates for the insurance contributions will total 26% of the tax base, as before, and with the following breakdown:

• 20% to the PF
• 2.9% to the SIF
• 1.1% to the FFMHI
• 2.0% to the TFMHI

Claims connected to a subsidiary’s outstanding debt to the insurance funds can be filed against the parent company if the parent company is financially involved in the subsidiary’s sale of goods (work or services), and vice versa. That is, if two companies are related, one of the companies (for example, the subsidiary) may ask clients to pay the parent company for the good, work, or service. In that case, if the subsidiary cannot meet its financial obligations to the insurance fund for three months, the court can require that the parent company pay this debt.

Legislation on tax and tax collection strives to prevent the misuse of STS, fragmentation of businesses, creation of  satellite companies and the use of other methods of receiving unjustified tax benefits.

Foreign Workers

Foreign workers are not entitled to pensions or social security under the laws of the Russian Federation. Consequently, as defined by the new law, the employer does not pay insurance premiums for these employees.

This will undoubtedly make companies that employ foreigners who are temporarily residing in Russia happy. Right now wages paid to foreign citizens are subject to the UST at the full rate of 26%. To some degree the change will help make up for the increased tax load for companies (mainly branches and representative offices of the foreign company in Russia) who employ foreigners temporarily residing in Russia.

However, there is a separate insurance premium for on-the-job accidents and occupational illnesses (defined in another law and which has always been a separate payment, i.e. not paid as part of the Unified Social Tax). This premium is paid for all employees, including foreign workers. The rate fluctuates between 0.2% and 8.5% depending on the type of work performed: the more likely it is that you will get injured on the job, the higher the rate. For example, the rate at a consulting firm is minimal – 0.2%, but the highest rate would be applied, as an example, to coal miners.

Thus, from the salary of a foreign worker residing in Russia:

• The employer pays from 0.2% to 8.5% in insurance premiums for on-the-job accidents and professional illnesses
• The employee pays 13% or 30% in personal income taxes (depending on whether or not he/she has been living in Russia at least 183 out of the last 12 months and is thus a resident for tax purposes).
  

Special Taxation Regimens

Taxpayers using STS, residents of technology special economic zones, and enterprises created for achieving social purposes (educational, cultural, health, science, etc.) will have a rate of 14% for contributions to the PF.

However, beginning in 2011, the rates for taxpayers that are not residents of technology special economic zones, that do not employ handicapped labor, are not created for achieving social purposes, and/or are not agricultural, will have the following rates:

• PF – 26%
• SIF – 2.9%
• FFMHI - 2,1%
• TFMHI – 3%

This comes to a sum total of 34%. Thus, beginning in 2011 the social tax burden will grow by one-third in comparison to 2009. Those who use STS will also have the same rates as those who use the regular tax system – that is, 34%.

The main changes to qualifying for transition to STS include the following:

• the maximum income an organization (or individual entrepreneur) can earn will be 60,000,000 rubles/year. Currently, this maximum income is set at 20,000,000 rubles times the index multiplier. The index multiplier will not be used in future calculations.
• only organizations with an income of less than 45,000,000 rubles during the first nine months of 2009 will have the right to transfer to STS. Currently, it is set at 15,000,000 times the index multiplier. Since the maximum income will be set so much higher than the current one, the code does not make provision for the future threshold to be increased annually by an index multiplier. 

The above changes will be in effect until Dec. 31, 2012. By that time, many more changes are certain to be implemented.

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