Russian Salaries & Tax Season
By James Logan
When one thinks about Russia, the word transparency in the business world is not the first thing that comes to mind. Transparency remains, after the end of communism 15 years ago, to be one of Russia’s most difficult issues and a definite block to further expansion. Transparency with respect to employee salaries is certainly no exception. This is not because taxes are so high that employees and employers are encouraged to settle their wages behind closed doors. According to many Russians, it is simply due to the fact that the government has the nerve to tax at all. But if one compares Russia to other national tax systems on personal income, it has some of the most palatable taxes in the world.
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Employees usually pay 13%, and there are practically no deductions to decipher other than one relatively minor deduction available to home buyers. Not that there is a lot that is simple in Russia, but the tax collection system could hardly be more user-friendly for citizens. Russians and foreigners alike are not required to do a tax filing. All tax issues are taken care of by the employer. The employer automatically makes their employer payments while withholding the employee’s 13%. The employee never has any paperwork or filings at the end of the year or in the spring as is the case in many countries. In fact, now it is tax season when everyone has to file taxes and no one is even aware of it. According to Artem Usov tax legal expert and author from the firm of Hellevig, Klein & Usov, the tax filing deadline for foreigners and Russians alike is April 30th. Employers are obligated to file employees’ taxes, but in the event that the employee has itemized deductions such as a home purchase or mortgage, or has internationally earned income, then the employee is obligated to file a tax return. According to Mr. Usov, foreigners who are in Russia less than 6 months need to pay at a 30% tax rate instead of the 13% but then only on Russian earned income. If a foreigner ends up staying more than the 6 months and was paying the 30%, he can apply for a refund from the employer. Another exception is when an employer has failed to withhold employee taxes when an employee is working on a contractor basis.
As for the employer, tax rates are not that offensive soas to encourage avoidance, at least by international standards. The total employer contribution (including pension contributions) stands at 26% for approximately the first $11,000, 10% for the next approximately $11,000 and 2% thereafter. A company who pays a mid-level manager $5,000 per month pays on average a little more than 7%. That is pretty low if you compare this with most European countries. The first question comes to mind, why are taxes so low? The answer lies in the history of Russia’s very young tax system. After the change of government in the early 1990's, the World Bank and various Western government officials encouraged the Russia government to become self-sustaining viz-a-viz tax collection in order to reduce its reliance on foreign sources of debt, among other reasons.
Avenir has developed an effective method to access this information. Avenir asks all employment candidates to fill out an extensive form when they visit Avenir for intake job interviews. After interviewing almost 4,000 candidates covering approximately 50 (of the most common) job positions in general business, Avenir has compiled job salary data along with other valuable employee information. An example of this is highlighted below. Over 70 companies were also surveyed to compliment this information. In the fast changing world of Russian business, the data is quite up to date as it is compiled twice a year.
There has been a multi-prong campaign underway to increase state tax revenues. Part of the campaign to achieve that audacious goal has been through an increase in trans parency in Russian economic life. One aspect of the campaign has been to adopt a very user-friendly tax system and in turn to encourage its citizens and local companies to pay taxes. A second aspect of the campaign has been to encourage transparency in terms of salary payments, allowing salaried consumers to become eligible for consumer financing. As the theory goes, when salaries are transparent and paid directly into employee bank accounts, employees would have debit/credit cards and would spend their money in recorded transactions at shops and since these transactions would be visible and taxable it would lead to government tax revenues. Yet another strategy of the campaign has been to increase non-cash purchases so that transactions become recordable and transparent. Only those consumers with “transparent” incomes would be eligible for consumer credit.
Since credit allows consumers more flexibility in their spending patterns, this translates into employees actually asking for “white salaries” and hence increased tax revenues in state coffers. In that regard, the World Bank, EBRD and other governmental and non-governmental organizations have been actively promoting and investing in the consumer finance sector. And so employers are being pushed both by the government to pay taxes (threats of incarceration/fines/company closure which get press attention) and also by employees. And a final part of this campaign involves a parallel drive in the retail sector to encourage Western-style retailers, retail chains and shopping centers. The current glitzy retail environment, at least in the large population centers of Russia, has stimulated transparent and tracked consumer sales translating into increased company taxes, employees (like shop assistants) tax compliance and a “whiter” economy in general.
All these efforts sound good on paper but in reality it takes time for everything to take effect. With such attractively low tax rates, one would think that tax compliance in Russia would be a common occurrence. But surprisingly to some, full tax compliance is not everyone’s cup of tea. One of the reasons behind this is that would-be tax Russian payers often fear that all their tax money is being squandered to buy the latest bullet proof stretch Maybach for governmental officials. That image of the government’s spending patterns does fit in with the reality that the government does not visibly spend taxpayer money on new infrastructure or social programs. The other reason for less than full compliance is that, whilst tax rates are simple, the burden on employers to comply with all the paperwork behind payrolls and employee expenses is extremely burdensome, encouraging employers to under-report.
A second factor is that since full tax compliance may not be equal in certain industries, competitors may be at a severe competitive disadvantage if their cost base is 5 to 10% higher due to their decision to fully comply with the law.
When all these factors are taken into consideration, it is no surprise that information about employees’ salaries is rather opaque. Unlike in the West, salary statistical systems are not as well established and the information tends to be less credible.
Obtaining salary information is a frustration for companies doing business in Russia, since this type of information is less available than in other markets. One other factor affecting this problem is that salaries are rising very fast in many sectors and for many positions. This translates into a significant burden for managers and companies since they have difficulties setting budgets as salary levels are often mere guesswork at the forecasting stage. This can translate into missing financial targets due to the lack of an important cost factor in running a business.