Aug 18, 2009: Law replacing the Unified Social Tax with social contributions

[This legal alert has been prepared by Baker & McKenzie]

The law replacing the Unified Social Tax with social contributions will come into effect on January 1, 2010. [Federal Law No.212-FZ dated July 24, 2009 On Insurance Contributions to the Pension Fund, Social Insurance Fund and Federal and Territorial Medical Insurance Funds (henceforth the “Law”)]

The Unified Social Tax will completely disappear from the Russian Tax Code and will be replaced by social contributions payable to the State Pension Fund, Social Security Fund, Federal Medical Insurance Fund and Territorial Medical Insurance Fund. According to the Russian Parliament, these amendments tie in with changes to the legislation on pensions and social benefits.

The Law introduces a new model of administrative control over calculation
and payment of social contributions to the various social funds which is
similar to the model that operated in Russia prior to 2001. Control over
payment of social contributions will be transferred from the Russian tax
authorities to the social funds. The Law also governs audits and the
imposition of penalties for late payment of social contributions. However,
social contributions, as well as the exemptions available, will be calculated
in much the same was as the Unified Social Tax is now. The Law gives the
state agency nominated by the Russian Government authority to clarify the
provisions of the Law.

Currently the Unified Social Tax is payable on a regressive tax scale from
26% down to 2%, with the lowest rate applicable to that part of an employee’s
annual salary in excess of 600,000 rubles (approximately US$ 19,350).
Under the new regulations social contributions will be paid at a flat tax rate.

From January 1, 2010, social contributions should be paid at 26% of an
employee’s salary, to be divided as follows:

20% to the Pension Fund;
2.9% to the Social Insurance Fund;
1.1% to the Federal Medical Insurance Fund; and
2.0% to the Territorial Medical Insurance Fund

From January 1, 2011, social contributions should be paid at 34% of an
employee’s salary, to be divided as follows:

26% to the Pension Fund;
2.9% to the Social Insurance Fund;
2.1% to the Federal Medical Insurance Fund; and
3.0% to the Territorial Medical Insurance Fund.

Importantly, social contributions payment will be capped. Payers will pay
social contributions at the rates above on the total salary until it reaches
415,000 rubles (approximately US$ 13,400) per calendar year. Thus, the
maximum amount of social contributions per employee for 2010 will be
capped at 107,900 rubles (approximately US$ 3,484). This threshold may
be adjusted by the Russian Government from January 1, 2011 and later
if average salaries increase. No social contributions will be required on
salary amounts in excess of this threshold. As a result, the Law gives
tax advantages for companies with highly paid employees.

Payers of social contributions will be required to submit the following
reporting documentation: (i) calculation of contributions to the Pension
and Medical Insurance Funds, which should be submitted to the funds
by the first day of the second month following the reporting quarter; and
(ii) calculation of contributions to the Social Insurance Fund, which should
be submitted to the Social Insurance Fund by the 15th of the month
following the reporting quarter.

By March 30, 2010 payers will be required to submit a declaration on
payment of pension contributions to the tax authorities. After a documentary
audit the results will be passed to the Pension Fund.
Articles 57 and 58 of the Law provide a list of payers (e.g. companies
using the unified agricultural tax, residents of high-tech special economic
zones, organizations applying the simplified system of taxation) that pay
reduced rates of social contributions.

The Law also establishes a list of expenses not taken into account when
calculating the base for social contributions for certain types of payers
(i.e., artists and musicians). These require documentary support and
if it is impossible to provide proper supporting documents the Law sets
a fixed rate of expenses that may be deducted based on the amount
of accrued income.