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Draft law on social insurance contributions: How to prepare for the 2012 potencial increase

Draft law on social insurance contributions: How to prepare for the 2012 potencial increase. Draft of law. The most important changes which were discussed and proposed by the Russian Government and the Ministry of Finance of the RF in 2012 are the following:

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Draft law on social insurance contributions: How to prepare for the 2012 potencial increase

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  1. Draft law on social insurance contributions: How to prepare for the 2012 potencial increase The American Chamber of Commerce in Russia Annual Tax Conference: “Tax reform in Russia: Where are we?” Anton Zaitsev, WatersOAGOctober, 19th, 2011

  2. Draft of law The most important changes which were discussed and proposed by the Russian Government and the Ministry of Finance of the RF in 2012 are the following: • a cap on the base contributions increases up to 512 000 RUB. An applicable general rate equals to 30%; • any amount exceeding a specific cap is subject to additional Pension fund contributions of 10%. Based on the Draft certain additional types of commercial activities were granted with incentives, in particular: • transport and telecommunication industry; • sales of medical and pharmaceutical goods, orthopedic units; • production of steel wires and curved steel profiles; • conducting of non-commercial social services; • charitable organizations.  Meanwhile, the spheres where the benefit applies are limited. The most of companies will face a social burden of 30% up to 512 000 RUB and 10% on amounts above this.

  3. Restructuring of business and related risks • Groups may consider a possibility of restructuring by using of companies which are granted with incentives provided by law (in particular business spheres). • Small and medium size businesses may revised their business models. As an alternative to the current practice, they may consider a possibility of outsourcing particular services and works by entering into civil law contracts with individual entrepreneurs or agent agreements. • It should be noted that singing a civil law contracts with individual entrepreneurs instead of labour agreements could lead to a significant decrease of a company’s social burden. However, there are some risks concerning service contracts which should be pointed out.

  4. Issues concerning income taxes Within the dispute resolution procedure, the tax authorities may use thefollowing criteriato challenge the company’s position on the civil law contracts: • terminated labor contract aimed at avoiding legal taxation; • invalidity of a civil law contract due to the factual existence of a labor relationship; • absence or lack of professional skills of the individual entrepreneur in the sphere of labor or services under the contract; • lack or insufficiency of primary supporting documents confirming the delivery of services; • other criteria, including an analysis of permanent place of work of the individual entrepreneur, the amount of fees for the acquired works and services in comparison with the amount of employee’s salary, business correspondence between parties, reports and other relevant information.

  5. Penalties If the civil law contract is reclassified by the authorities to the labour agreement, the company faces with an exposure of additional liabilities for social security payments to non-budgetary funds and for personal income tax (the liability acting as a tax agent of the employee)*. Moreover, in a worst case scenario, the company’s expenses incurred under a civil law contract would be treated by the tax authorities as economically unjustified and the profits tax liabilities may arise. * The penalties for violations of social and tax legislation are 20% to 40% of funds to be paid.

  6. Recommendations In conclusion, when entering a civil law contract, we recommend that companies consider the following: • determine the subject of contract in details (the list of services and works); • agree on the document’s workflow related to the acquired services (performed works); • stipulate the formula for the calculation of fees; • exclude the provisions related to social guarantees: annual vacations, compensation of sick allowance, etc; In specific cases, it could be advisable to enter into an agent agreement with the counterparties. In case of restructuring of groups the companies are entitled for incentives in particular business spheres could be used.

  7. The end Thank you forattention. If you have any questions, please contact us:

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