- August 26, 2009
The system and rates of employers’ social security and pension contributions is due to change from January 1, 2010. We have noticed that the information circulating in the press regarding these changes is incomplete and misleading. Therefore we want to take this opportunity to briefly explain the current Social Tax system and the upcoming changes. What seems to have gone unnoticed was the fact that that the present system was based on a regressive scale where the highest rate sets the maximum charge for a given salary up to certain limits while salaries beyond the limit were charged with a smaller rate up to another threshold level of salary was charged with an even smaller rate. After the change there will be only one threshold up to which the rate is applicable; all salaries beyond the threshold are free of any charge. The effective rates are thus lower than the published rates when calculated on real salaries that exceed the maximum levels of salaries to which the employer’s social contribution applies.
Currently there is a unified social tax which is charged according to a regressive scale ranging from 26% to 2% (for companies with a simplified tax system; from 14%) depending on the amount of payments on an annual basis.
3 Forms of Social Security Contributions instead of the Present Social Tax
Starting January 1, 2010 the current unified social tax will be replaced by a system whereby the taxpayers make contributions to three different agencies for pensions, medical care, temporary disability and maternity. The contributions will be charged for salaries up 415,000 rubles per annum; all payments exceeding this amount will be exempt from the social security contributions. Starting 2011, the initial upper limit of 415,000 RUR will be annually indexed. The rate applicable for the charge is 34%, which will be in force for all categories of taxpayers (employers) after an initial transit period when other rates are applied (see below on Transitional Rules).
Transitional Rules (2010-2014)
In 2010, a rate of 26% will be applied on all social security contributions for salaries that do not exceed 415,000 RUR per annum. For small businesses that are taxed under the simplified system of taxation the tax rate of 14% is extended to be in effect year 2010 after which the regular rates will be applicable. For certain other categories of taxpayers reduced rates will be applied temporarily until year 2014.
The Effective Tax Rate
It should be noted that in this Russian system of employers’ social contributions there is a cap (a maximum ceiling) on the amount of salary paid (to one employee per annum) and, therefore, the nominal tax rate as defined as the rate charged from salaries up to the cap should be compared with the effective rate that is charged from different salary levels. Thus, the nominal rate of 34% of salaries up to 415,000 rubles should be compared with the average annual effective burden on various monthly salaries. We give some examples of this in the below chart.
Comparative chart for the social security contributions and social taxes according to the general rule:
|2010 (cap 415 000)||2011 (cap 415 000)|
|30 000||360 000||22.4%||26%||34%|
|60 000||720 000||14.9%||14.9%||19.6%|
|120 000||1 440 000||8.4%||7.5%||9.8%|
|240 000||2 880 000||5.2%||3.7%||4.9%|
The chart shows that the social security contributions system is very lenient and fair, representing some of the lowest rates of employer social contributions in the world. Unfortunately, the Russian lawmaker has not foreseen a possibility to even out the payments over the year. This means that there is a huge cash flow burden on companies in the beginning of the year when the companies are required to pay according to the highest progression. The Russian government would be well advised to amend the law in a manner that would distribute the burden more evenly throughout the year. This could be established by allowing companies to make payments subsequently over a period of time, even if the payments accrued in accordance with the given rates.
Please, note that we have only given a brief characterization of what we find as the most important considerations pertaining to these issues. We therefore recommend you to verify the details before acting on this information letter.