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. Last Updated: 07/27/2016

Duma Working Group to Protect Social Tax

The State Duma is creating a working group to oversee three funds so that they do not disrupt reforms of the social tax, although analysts say the majority of problems are the result of changes approved by the deputies themselves.

Disputes about replacing the social tax with insurance payments from 2010 have all but ended, replaced by a fear of the unknown. "Initially it will be a muddle, and companies will end up with a lot of extra work," said Yury Dombrovsky, chairman of Tele2 Russia. Before a new set of rules can work, there will have to be a phase when "no one knows what to do," agreed Nikolai Vlasenko, chairman of Victoria Group.

The Duma caught wind of the business community's anxiety, and Andrei Isayev, chairman of the Labor and Social Policy Committee, decided to create a working group of deputies and senators to monitor preparations for the reform.

"We don't want a repeat of what happened with the monetization of social benefits," Isayev said, Interfax reported. He promised that the group would ask questions and demand swift solutions to problems.

All executive and normative documents related to the changes should be developed, approved and sent to the regions by Jan. 1, said Valery Ryazansky, first deputy head of United Russia's faction in the Duma.

There are already plenty of questions regarding the administration of insurance payments. Beginning in 2010, companies will be required to make three payments in place of the unified social tax: 20 percent for pensions (26 percent starting in 2011), 3.1 percent for medical insurance (5.1 percent from 2011) and 2.9 percent to the social insurance fund.

The payments will no longer be classified as taxes and will be regulated by laws independent from the Tax Code. The funds — for pensions, social insurance and obligatory medical insurance — will collect the payments themselves.

The Finance Ministry's explanations regarding application of the law are losing their force, and so far there is nothing to replace them, said Andrei Grachev, a lawyer at Pepeliaev, Goltsblat & Partners.

He said it is unclear from the law who will replace the Finance Ministry: just the Health and Social Development Ministry, or the ministry and all three funds. In the second case, the funds would collect the payments and be able to explain how they should be paid..

Marita Nagoga, a spokeswoman for the Pension Fund, said everything was going according to schedule, but that if a working group were created, the fund would cooperate with it. A brochure for employers is being developed to explain how to make the new payments, she said.

Vedomosti obtained plans for the brochure, which said the Health and Social Development Ministry alone would have the right to explain the application of the law. The funds will only be allowed to inform companies of the rules.

Inspections carried out by the funds' staff pose another problem, said Dmitry Kostalgin, a partner at Taxadvisor. Under the law, they should all come together, but no one bears responsibility for not following the rules.

As a result, companies will have another two or three inspections from the funds in addition to tax checks, he said.

The fund officials will have less authority than the tax inspectors, however. They will be forbidden from freezing accounts, extending an on-site inspection for more than two months, and seizing documents. But for some reason, companies will not have the right to contest decisions on an inspection, Grachev said, and the funds will not be prohibited from asking for the same documents multiple times.

The funds will also face some unpleasant situations, Kostalgin said, noting that they received the right to transfer funds from companies' accounts to make the payments. In 1996, however, the Constitutional Court allowed such actions to collect taxes, meaning the court's ruling would no longer apply to the payments.

As a result, it will become more difficult to punish companies that are not following the rules, Kostalgin said. Currently, tax inspectors are using the Supreme Arbitration Court's rulings on unfounded tax advantages.

Companies list the introduction of electronic reporting as one of the definite pluses in the new rules. Firms with more than 100 employees will be required to file electronically in 2010, and the threshold will be dropped to 50 employees from 2011.

Vlasenko, of Victoria Group, said he was glad to see the simplification. Every month, the company orders several trucks to deliver its documents to the authorities, he said.