RS Brief news Ambiguity of social insurance contributions

Ambiguity of social insurance contributions

March 2011

The increase in the rates of social insurance contributions in Russia since 2011 is still the most pressing issue both for business operators and for the Russian government. The uniform social tax (UST) was replaced by social insurance contributions in 2010. The regressive tax (based on the principle - the higher the salary, the lower the tax) was abolished. Since 2010 employers had to deduct for taxes 26% of each employee’s payroll until the employee's earnings reached 415,000 rubles (~ USD 14K) since the beginning of the year. Afterwards the tax contribution amounted to 0%. Since January 1, 2011 the contributions to social off-budget funds have increased to 34%. Under these rules the employer will have to pay taxes until the employee’s salary accrual reaches 463,000 rubles (~ USD 16K). Transition to the payment of contributions means that workers will insure themselves against loss of income in old age, illness or disability by contributing money to the funds. To be precise, this operation will be handled by the accounting department of the employer for each of its employees. According to Russian experts, the increase in contribution rates will result in curtailing jobs, worsening working conditions and lowering wages.

The Ministry for Economic Development of the Russian Federation has come up with different ways to address this issue. Elvira Nabiullina, Minister for Economic Development of the RF, says that it is necessary to lower business taxes and collect more expenditure, consumption, real estate and property taxes. The minister said, “the increase in excise duties on alcohol, tobacco and real estate taxation is among the measures that are being considered at the moment”. According to the minister, this work has not been completed yet, and it is carried out in contact with business community, especially with small and medium-sized businesses engaged in the processing sector. The increase in social contribution rates has hit them hard.

At the same time, according to Alexei Kudrin, Finance Minister of the Russian Federation, the business community requests that this tax burden should be reduced, and even warns that otherwise it will consider tax evasion. The minister mentioned that presently Russia enjoys a better ability to collect taxes. "Now is not the same time, as it was ten years ago when there were different tax evasion schemes, and the influence of tax authorities was limited." According to the minister, the reduction of tax burden is not currently under consideration ...

It should be mentioned that payments to certain categories of foreign nationals are not subject to social contributions. In this case the preferences emerged to the benefit of most foreign citizens staying in Russia as temporary residents. This procedure makes foreign workers a more profitable and competitive option for employers if compared with Russian citizens.

You can find out more about exemptions from payment of income tax for highly-skilled professionals according to the Russian law in the article ‘Hospitality’ of Russian taxes.