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Russian Enterprises Will Have Increased Tax Obligations In 2010

Russian businesses have a whole new set of changes in the tax system in store for them beginning in 2010. The tax load will be higher than it was before.

In general, during a crisis Russias tax policies show contradictory impulses. On the one hand, an economic recession requires that tax policies be loosened for businesses, but on the other, the income to the state budget is falling. Overall, the tax policies adopted in 2008 were beneficial for businesses: they were given new amortization procedures, more opportunities to write off expenses for personnel, plus VAT was cancelled on imports of equipment that couldnt be purchased in Russia. According to a survey of 100 businessmen, the most beneficial of all tax initiatives in 2009 was the decrease of the profit tax from 24 to 20 percent (reported 71 percent of respondents). Sixty-six percent of companies thought that being provided the option of paying VAT every three months (rather than every month) was most beneficial.

However, state experts believe the crisis is passing, and the first priority is the state treasury. Lawmakers that met businesses half way should now make the same steps to meet the Ministry of Finance (MinFin) in his letter on the state budget it was no mistake that the president spoke of the mobilization of state revenue with regard to new methods of tax administration.

In 2010 some new tax laws should come into force some of them have already been signed, while others are expected to pass during the autumn session of Parliament. For example, businessmen who commit tax crimes for the first time will be acquitted of charges if all taxes, fines, and duties are paid in full. Vertically-integrated holding companies will be forced to prove that the prices they use to sell products are not transfer prices. There will be no presumption of innocence in this sphere.

However, the measure that is likely to affect all Russian enterprises without exception is the replacement of the Unified Social Tax (UST) with four insurance payments. These will go to the Pension Fund, the Mandatory Health Insurance Funds (both federal and territorial) and the Social Insurance Fund.

The Payment System

From the perspective of accountants, this will mean there will be accounting for four separate payments instead of one. But the main problem is that the cancellation of UST comes along with a change in the rates by which companies insurance contributions will be calculated. Currently payment of UST depends on an employees salary, and is calculated at a rate of 26, 10, or 2 percent. In 2010, however, there will be a set rate of 26 percent, and in 2011 the rate will be increased to 34 percent.

While its true that fund contributions wont be calculated for salaries higher than 415,000 rubles/year (about 35,000 rubles/month), according to a survey of enterprises conducted by Co-Invest, the tax load on companies will still be higher than it was before.

OST-Akva, a company that produces beverages, reports that the result of all these reforms will be a 6-8 percent tax increase on salary and a 0.2 percent increase on production costs. JSC All-Russia Institute of Light Alloys reports that these changes will lead to an 8 percent increase on personnel expenses and a 4 percent increase on production costs.

The cancellation of UST will have a negative effect on business, but it will force them to search for hidden reserves. Business representatives say that along with indexing wages to inflation, an rate increase will lead to higher expenses on personnel by 20 percent when compared with sales volume.

Companies whose overall expenses include a high share of personnel costs, including scientific and engineering companies, will be the worst off. Salaries consist of about 50 percent of IT companies and IT consulting companies overall expenses (while in other industries this is closer to 15 percent), notes the general director of one IT company. Our company is definitely going to feel these measures. Heads of IT companies have asked Dmitry Medvedev to consider cancelling UST, since UST will lead to an outflow of business abroad, while inside Russia companies will resort to gray salary schemes. We didnt want to see such harsh steps taken by the government in this sphere. Unfortunately, its not uncommon for civil servants to talk about easing up, when really they are cracking down on us.

Organizations with high salaries for qualified employees and top-managers will be able to decrease their tax loads by downsizing high-paid staff. For example, one consulting company has a staff of about 100 people, and expenses on salary consist of more than 51 million rubles/year. About one-fourth of all staff receives more than a million rubles/year. Experts calculate that if in 2009 this company pays about 7.7 million rubles for UST, in 2010 this companys tax load will consist of 7.96 million rubles a 3.5 percent increase.

The increased load will be felt most by companies who pay salaries in the range of 280,000-415,000 rubles/year.

Who's Inspecting the Process?

An additional concern for businesses is that employees of the Pension Fund and Social Insurance Fund are being authorized to conduct inspections. Accountants of one enterprise point out that its already clear that the increased number of inspectors who have the same authority as tax inspectors will lead to an increase in the quantity of reports, inspections, and obligations for companies to submit additional certificates to the funds.

Most accountants dont understand the need for the funds to have the right to conduct inspections when the tax authorities could do this themselves, especially considering the obvious minuses from an administrative point of view.

Some doubt these laws will take effect on time, considering that the Pension Fund and social insurance fund do not have the infrastructure to conduct inspections. At first it was rumored that 10,000 FTS employees would be transferred to the social funds, but now its clear that the FTS doesnt have the resources to do so. Moreover, from a legal perspective, it is not easy to transfer employees from one federal jurisdiction to another, especially considering these employees will not be keen to make the move due to the fact that the salary is lower for Pension Fund employees. At the end of the year the Duma could pass an amendment giving tax authorities jurisdiction of conducting inspections of payments to the funds, as before.  

Construction in Russia

Besides the radical changes to salary taxation, some other minor changes are also expected. One of these concerns builders, as well as those who have major investments in the construction of new buildings or enterprises. When an investor purchases a plot of land, they are often required to conclude a public or private agreement with local authorities on the territorys development, and besides the desired factory or office building, they decide whether to also build daycare centers, to construct electrical lines and roads, to improve surrounding plots, etc. These objects are later transferred to local authorities or operating organizations. Does the investor have the right to write off expenses on the building of daycare centers, roads, etc.? Or is this something more like beneficence that can only be actualized using profit?

This is not a superfluous question. If the costs for building daycare centers can be written off as expenses, 20 percent of the construction cost can be returned by profit tax write-offs. Investors often conclude investor agreements in order to aid development of corresponding municipal districts through construction or reconstruction, notes Matvey Manuilov, Director of PricewaterhouseCoopers. The tax authorities often dispute investors tax deductions for the construction of social infrastructure, since current tax legislation dictates that the cost of the gratuitous transfer of property, work or services, as well as expenses related to such transfers, do not lower the tax base on the profit tax. VAT deductions for such expenses can also be disputed. As a result, an investors expenses for carrying out a project are significantly increased.

According to Yuliana Medvedeva, the leading expert of AKG BANKO, the amount of expenses on development of territory sometimes consists of 5 percent of production costs, while Vasily Bryakukh, Financial Director of the investment development company City-XXI, says this number is closer to 30 percent. As one market participant said, the cost of building an average-sized office building is 300 million rubles, and out of that sum about 15 million rubles could be used on development of the territory. Thus, about 3 million rubles are at stake for the profit tax.

MinFin is proposing that expenses on transportation and communal infrastructure be  tax-deductable until 2010, at which time they will no longer be tax-deductable. This would only be applicable to investors whose expenses were made during the period Jan.1, 2007 - Jan.1, 2010.

However, construction market experts believe that this measure wont stop investors whove been planning to build such constructions from doing so, while those whove already begun such projects will simply have a smaller tax load. 

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