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Old Tax Optimization Schemes Return


A scheme popular in the 1990s is becoming popular again: employers are increasingly paying salaries “in envelopes” – i.e. under the table. The method may be different, but in essence it’s the same scheme to avoid paying the full amount of taxes on salaries.

It’s no secret that salaries have different colors in Russia. A white salary is one in which the employer pays the employee legally, including all taxes. A black salary is one in which the employee does not appear on the company’s roster of employees at all, and therefore no tax is paid whatsoever. A gray salary scheme is one in which a small part of the employee’s salary is paid officially, and part is paid under the table so the employer does not have to pay the full amount of taxes on the employee’s salary.

Expenses connected to paying salaries often make up more than 50 percent of a company’s expenses – there are taxes for the labor compensation fund, the social insurance fund, the mandatory medical insurance fund, the pension fund, the Unified Social Tax (ESN) and others. Many small and mid-sized business owners – who felt the crisis first – ran into the problem of insufficient funds (banks are not granting credit, suppliers deliver goods late but demand pre-payment, customers delay paying, etc). When money is on hand, many business owners prefer to invest it in their business rather than pay taxes.

While major corporations can get creative in tax evasion schemes, small and mid-sized businesses prefer the tried and true methods, such as paying salaries under the table, in part so as not to deal with so much paper work (for instance, related to insurance filing). Tax evasion schemes are more popular in Russia than in Europe, even though taxes are much higher in Europe. Tax consultants warn that in Russia the punitive legislation on tax evasion schemes will become more severe, but when adoption of such schemes are a company’s only alternative to company liquidation, business owners may not have much difficulty making the choice, especially under conditions of an economic crisis, when their only income comes from the business at hand.

Gray salary schemes are not beneficial for an employee. Besides decreasing his future pension, there are risks involved with not paying the full amount of PIT on his income. Also, he faces the danger of not actually being paid the “black” part of his salary, since he has lost legal rights to it. Once an employee agrees to a gray or black salary scheme, it becomes his obligation to justify that such a scheme was unavoidable if it comes to the attention of tax authorities (Article 56 of the Civil Procedure Code), and is very difficult to do. However, the employee often does not have a choice: he faces the prospect of losing his job.

If an employee fights for his right to be paid a white salary, the Labor Code is supposed to protect the employee. An employer does not have the right to lower an employee’s salary without his consent. By law such an action requires that long and precise Labor Code procedures be followed, and even then is not guaranteed if the employee is against it. If an employer goes through all the procedures and manages to lower the employee’s salary, the employee has the right to take the matter to court, a process that can be long and expensive for the employer. The court may also inform the State Labor Inspection of the case.

Trade unions can also help. Federal Law N 10 “On Trade Unions, Their Legal Rights and Guarantees of Activity” dated January 12, 1996 gives trade unions and employees rather wide-reaching powers. Creating a trade union is not as difficult as many people think – one can be created by the initiative of 3 employees (Article 18 of Federal Law N 82). Registering trade unions is only necessary to receive the status of a legal entity and registration procedures are not difficult. The rights and obligations imparted by labor legislation are in full effect beginning from the moment they are created. Despite their relative uselessness in Soviet times, today they really can help protect employees who are members, including against gray and black salary schemes.

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