Russia: Expats Go to Court
Over Pension Dues
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.
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
From $20,000 and up,
at least 79 percent of the tax goes toward pensions.
estimates that if expatriates were exempt from pension contributions,
their annual medical and social insurance contributions would be capped at
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
Not a lot, reckons
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
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.
contributions have sparked strong antipathy because they were not levied
before, and because people feel they are not getting anything for
them," she said.
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.
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.
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.
they've only done the first part -- they've imposed the tax."
The complaint has met
little sympathy in Russia.
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.
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."
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
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
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."