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Ever since the Russian Federation's unified social tax (UST) came into effect in 2001, a number of questions have been raised about the tax imposed on wages paid to foreign citizens with the status of 'temporary residents' in the Russian Federation.

Temporary residents make up the majority of foreigners working in Russia, and the UST was taken at source from their wages with the proceeds used to pay for social benefits. However, despite paying this tax, temporary residents could not actually enjoy social benefits, including Russian pensions, sick pay and the full set of medical services under compulsory health insurance programme on an equal basis with Russian citizens.

Many tax specialists found it difficult to justify the social fairness of this law and UST was cancelled by Federal Law No. 212, which came into effect in July 2009 and was titled 'About insurance contributions to the Pension Fund of the Russian Federation, Social Insurance Fund of the Russian Federation, Federal Fund of the Compulsory Health Insurance and regional funds of the compulsory health insurance of the Russian Federation'.

Though at first sight the new law was fairer, it now appears to have put Russian citizens at a disadvantage in the job market compared to foreign citizens and those without citizenship.

According to the new law, payments and other remunerations paid under labour contracts to temporary residents in the Russian Federation are exempt from insurance contributions. This seemed to be fair, based on the argument that if an individual does not receive social benefits, the insurance contributions to pay for these benefits should not be paid by the employer.

But if we take a wider look at the situation, temporary residents staying in Russia have gained an evident advantage over Russian citizens in terms of employment as, starting this year, employers of temporary residents will be able to save on insurance contributions legally.

In 2010, these savings will make up 26% of the amount of contract payments to a maximum of 107,900 rubles (just over $US3,500) per employee; next year this percentage may reach 34% of contract amounts.

This will allow Russian businesses to make considerable savings simply by replacing Russian employees with foreign 'temporary residents'.

Businesses that employ a large number of people will be particularly interested in these opportunities. Low-qualified personnel will be the easiest to replace and could mean that jobs such as worker, builder, trolley bus and bus driver or shop assistant will never again be filled by Russian citizens. It will also be more profitable to hire foreigners for highly qualified or managerial positions.

ACCA believes that the law should be revisited to create a level playing field for Russian and temporary residents alike, and to ensure that the Russian economy continues to grow.

Tatiana Souboch ACCA
Business relations manager
ACCA Russia

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