back

 

Russia: Expats Go to Court Over Pension Dues

By Alex Fak, the Moscow Times

December 22, 2003

 

  

No one is throwing tea into the harbor just yet, but a new court case is setting the stage for a tax revolt among Western expatriates working in Russia.

On Friday an international consulting firm filed a query with the Constitutional Court, asking it to clarify why a company must pay the unified social tax for foreign employees when they cannot benefit from state pensions.

"It's a landmark moment" for foreigners' rights in Russia, said Karina Khudenko, senior tax manager at PricewaterhouseCoopers.

The bulk of the social tax is directed into the State Pension Fund, with smaller amounts going toward social and medical insurance. Foreigners were exempt from the tax before this year, when a new tax code went into effect.

The government insists that foreigners working in Russia must pay Russian taxes.

Akhmed Glashev, the lawyer who prepared the brief for Rodl & Partner Konsu consultants, said the complaint centers on pension contributions. The codes requiring foreigners to pay the levy -- and then prohibiting them from collecting it --are unconstitutional, he said.

"It is clearly unfair to charge the pension portion" of the tax, said Khudenko. "As for the social insurance and medical insurance part, there is nothing in the law that would give grounds not to charge that contribution on the income of expatriates."

The unified social tax is a regressive payroll tax on the employer. Svetlana Meyer, senior manager at Deloitte & Touche CIS, estimates that the effective tax rate on a $20,000 yearly salary is 18 percent, sliding down to 8 percent for $50,000 and to 5 percent for $100,000.

From $20,000 and up, at least 79 percent of the tax goes toward pensions.

Khudenko estimates that if expatriates were exempt from pension contributions, their annual medical and social insurance contributions would be capped at around $700.

Only Russian companies and branches of foreign firms pay the tax.

When a foreign employer seconds workers to a Russian firm, it is not required to pay the tax because it is not registered in the country. Therefore it is hard to estimate how much money the Pension Fund receives in foreigners' contributions.

Not a lot, reckons Khudenko.

"It would be much better for the image of the Pension Fund and the government in general to abolish these levies on foreign nationals," she said.

The main opponent of the exemption, however, is not the Pension Fund but the Finance Ministry.

In a letter dated Sept. 19, Natalya Komova, a ministry official, said companies must pay for all employees working in Russia "regardless of the status of the employers [or] the employee, and also regardless of whether the wage payments take place in Russia or abroad."

Komova went on to say that foreigners are indeed eligible for Russian pensions, but "the question about the allocation of the pension to foreign citizens once they reach retirement age is under the jurisdiction of the Labor Ministry and the Pension Fund."

None of these agencies could be reached Friday.

The rates are not especially burdensome for high salaries, said Deloitte's Meyer, but the fact that the pension benefits cannot be reaped gives rise to a sense of unfairness among Western expats.

"The pension contributions have sparked strong antipathy because they were not levied before, and because people feel they are not getting anything for them," she said.

The case also touches on the issue of double taxation. Unlike most Western nations, Russia does not have a treaty with any other country ensuring that similar social contributions are not levied concurrently.

Ilppo Eresmaa, executive manager at Rodl and the chief plaintiff in the case, says he is already paying hefty pension contributions in Finland. Americans, too, pay social security tax on money earned in Russia.

"Most countries tax foreigners but have provisions that when the foreign citizen leaves, the company is reimbursed," said Andrew Somers, president of the American Chamber of Commerce in Russia.

"In Russia, they've only done the first part -- they've imposed the tax."

The complaint has met little sympathy in Russia.

In theory, Western expats have a right to Russian social benefits, such as sick days and pregnancy subsidies, Vedomosti said in a recent editorial. And after all, rich Russians also have to support a system they are unlikely to use.

"The Russian press has been somewhat patriotic," said Eresmaa. "They are talking as if we are taking away their pensions."

"Sure, this tax is not the largest one. But as a law firm, we feel it is our duty to our clients to lower taxes. We are looking for clarity in the tax code."

The fairness of taxing foreigners is a tricky issue, said Deloitte's Meyer.

"The point of the law, I believe, is that the company that comes to the market supports the Russian social system. On the other hand, no normal expat would use one of those district clinics or file for a Russian pension."

Somers and Meyer say the best solution would be for Russia to sign agreements on double taxation.

But Yekaterina Yemelyanova, co-chair of AmCham's tax committee, said the Russians have been unwilling to negotiate on the point.

"The Russians are saying, 'How do we know they won't assume Russian citizenship later on [and claim a pension]?' Well, theoretically, I have the right to fly into space -- will they start charging a special tax for that, too?"

Yemelyanova said the mentality behind excessively redistributive taxation has its roots in populism.

Clear laws, not emotions, are needed, said Meyer. "People must feel they are not being ripped off. And right now, many foreigners certainly feel they are."

Copyright 2002 Global Action on Aging
Terms of Use  |  Privacy Policy  |  Contact Us