No more Unified Social Tax
The Pension Fund of Russia (PFR) will start collecting insurance premiums that replace the abolished Unified Social Tax as of February 15, 2010. During a meeting with Prime Minister Vladimir Putin, the head of the PFR, Anton Drozdov, reported that preparation for taking over some powers of the tax agencies have been completed. The fund's head promised the Prime Minister that "there will be no slip-ups." However, experts say birth pangs are inevitable and predict an increased number of litigations between companies and the PFR.
PFR head Anton Drozdov on Friday reported to the Prime Minister that the PFR is ready to replace the tax agencies in collecting payments from employers and briefed him on progress in the recalculation of pensions. January 1, 2010 marked the start of two pension projects: replacement of the Unified Social Tax with insurance premiums and the valorization (reassessment) of pension rights for pensioners.
Valorization is shortly to be completed. Drozdov said that the Fund has already reassessed the pension entitlements of 35 million pensioners: pensions increased by 1% for every year of work prior to 1991 and by 10% for work between 1991 and 2001. Another new development in 2010 concerns the poorest pensioners: five million pensioners will get additional payments to bring their pensions up to the level of the regional subsistence minimum, according to Mr Drozdov.
The replacement of the Unified Social Tax with an insurance premium is more problematic. That change does not increase the load on employers as the rise of the total payments rate from 26 to 34% of the wage fund will not occur until 2011. So far, possible problems with the administration of payments are the main concern.
In late 2009, the RUIE board urged the government to postpone the reform until 2012, arguing that it has not been properly prepared: the required regulations were adopted at the eleventh hour, which prevented business entities from preparing for the new payment scheme in advance. However, on Friday Mr Drozdov assured Vladimir Putin that the PFR was ready to collect the payments. "We have conducted all the preparatory work and insurance payments will start flowing under the new scheme beginning February 15," he said.
Experts believe that the new procedure will generate significant litigation between entrepreneurs and the PFR. One of the reasons is that off-budget funds are not de jure part of the system of government bodies and have no formal right to pass binding legislation and apply coercive measures to the payers of contributions (for example, writing off money from the accounts of companies to compensate for shortfalls). The head of the State Duma Committee for Labour and Social Policy, Andrei Isayev, believes that the situation can only be clarified by the adoption of a law on the status of the PFR that would determine its special character in the structure of government power.
Dmitry Ruvinsky of Grant Thornton is sure that the transitional period will throw up some problems: accountants will have to deal with new forms of documents and new auditors from the PFR: "their level of knowledge and what they will come up with in the course of these audits is anybody's guess." According to the expert, the tax base for the Unified Social Tax and the newly introduced insurance premiums are not identical-some former methods of cost minimization will no longer work in 2010 and "minor details in practice may translate into real money for businesses."
Yulia Kuznetsova of Sameta believes that the greatest difficulties will be experienced by the enterprises that did not previously pay the Unified Social Tax because they used a simplified taxation system or paid a unified tax on imputed income. "In addition to an increased tax burden they will have to report to the PFR according to the common rules. One possible consequence of this could be the termination of workers or switching them to ‘under the table' wages," Ms Kuznetsova says.
During their working meeting, Vladimir Putin and Anton Drozdov did not discuss what really worries business in connection with the unified social tax reform, i.e., the promise of compensation for the growth of the fiscal burden.
One could detect a relevant signal from another high-level meeting, however, that was recently conducted by the President on economic issues. According to Deputy Prime Minister Alexei Kudrin, the proposals on tax policy guidelines being prepared for the government meeting on February 25 must take into account the directives of the latest presidential address. One of these envisages a five-year transition period of increasing insurance contributions for organizations engaged in innovative activities.
Vadim Visloguzov, Darya Nikolayeva