Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Foreign Firms Bite Bullet in Wage Tax's Last Year

The fierce battle raging a year ago over foreign firms paying the much-hated excess wages tax has subsided this spring, with most representative offices likely to include it in their returns in time for Monday's deadline, tax authorities and consultants said Friday.

Monday is the deadline for all 8,000 foreign representative offices in Russia to file their 1995 tax returns, including -- for many -- the 35 percent payroll tax known as the excess wages tax. The consolation is that the tax was abolished in the 1996 budget.

A wave of protest shot through the foreign community last March, when foreign representative offices were told the tax liability fell on them as well as their Russian counterparts. After some legal clarification, many seemed to have resigned themselves to payment.

"Most clients treat it as a dead issue," said Bill Henry, senior tax manager at Ernst & Young. "It was very hot last year but has died down quite a bit."

The tax, which could add up to hundreds of thousands of dollars for employee-heavy firms, was hotly contested because of what some considered a murky legal basis regarding foreign representative offices.

The tax is based on the federal profits tax law, which does not include foreign representative offices, but a number of pieces of subordinate legislation have amended that law. In July 1995, Instruction 34 of the State Tax Inspectorate specified for the first time that the tax applied to foreign representative offices "engaged in commercial activities."

That means some foreign firms which do not engage in trade but perform only certain liaison activities for parent companies -- such as market research or meeting with potential customers -- are not liable to pay the excess wages tax.

While some will fight the tax, many seem to be resigned to paying, not least because the tax itself has been abolished starting from the 1996 tax year.

"I think companies that have decided to just go ahead and pay it and be done with it [did so thinking] it's a hit but after 1995 the tax is gone," said Alex Chmelev, an attorney at Baker & McKenzie and co-chairman of the American Chamber of Commerce's Taxation Committee. "I suspect a lot of companies will just go ahead and pay it."

Even the tax authorities expect things to go smoothly.

"Of those who must pay, I think the majority will pay," said Mikhail Sheiunok, head of the international tax relations department the State Tax Service. "In any case, we're trying."

Sheiunok said there had been "a few negative cases" in which foreign representative offices fought paying the tax, but for the most part firms complied.

"If we explain to them that it's necessary under the law, they understand. They are more law-abiding than Russian firms," he said.

Finance Ministry experts said last year the excess wages tax was projected to bring in 6.9 trillion rubles ($1.4 billion at current exchange rate) to the treasury.

He added that of the 8,000 foreign representative offices in Russia, a majority are likely not liable to pay because of the noncommercial nature of their activities.

Still, not all of those who are liable will be ticking the appropriate box on the 1995 declaration.

"The excess wages tax is not something that we as a representative office have been advised by our consultants that we have to pay, but if it's deemed by the authorities that we were liable then we have accrued and we will pay," said an official at one foreign representative office, who declined to be identified.

Some tax experts say there is a legal basis for fighting the tax.

"There are very solid legal grounds not to pay this," said Scott Antel, a manager of the tax and legal division at Arthur Andersen. He said Instruction 34 is not a federal law, and Decree 1466 guards against unfavorable legislation for foreign companies for three years.

In addition, lawyers and consultants said that when a few foreign representative offices refused to pay the excess wages tax for 1994 -- which was mandated by the 1995 Instruction 34 -- the tax authorities agreed on a compromise, allowing them to skip the hefty penalties.

The fine for not paying the excess wages tax is 0.7 percent of total tax due for each day of late payment. The tax itself kicks in on salaries after calculating six times the monthly minimum wage (79,800 rubles), fixing the 35 percent rate on almost all salaries.