Social tax break on the cards

With President Dmitry Medvedev saying the social tax rate - which pays for health care and pensions - should be lowered. Business RT spoke with Pyotr Medvedev a Partner at Ernst and Young.

­RT:  The social tax – it's been only three months since this higher rate was introduced, why are they looking at lowering it so soon?

PM:  “Good question, I think that it would be fair to say that since the moment the increase in the social tax was announced back in 2010, business has started criticizing it quite severely, because based on these calculations the major impact this tax had in the first three months was actually on small businesses, which is the most sore point of the Russian economy.  The tax burden on this segment of the economy actually increased, allegedly, by the factor of 2.5 times, which is quite bad, especially for the company that would normally struggle to have cash anyway.”

RT:  That is a large amount….

PM:  It is a big chunk of money especially given that for most of these companies the salary costs are actually the main costs incurred.  And that is a reason why various organizations are advocating to reduce the tax.  It is still not clear whether the tax will be reduced for all the businesses, or be done on a selective base, for example, only for small businesses that operate in certain sectors of the economy.  It still remains to be seen.  It is certainly a sign which is welcomed by all the business community.

RT:  How will this change the investment climate in Russia?

PM:  “It may sound an interesting thought from somebody who practices tax but I don’t think the tax system is one which deters the investment climate in Russia.  Clearly a reduction of the social tax rate will improve the investment climate.  Tax is an expense and all business is looking at optimizing expenses, reducing their costs, so any reduction in costs is great for business.  But realistically if you look mat the overall investment climate in Russia, tax is not the issue.  I have been practicing tax for, give or take a bit, for twenty years by now, and I don’t remember a single foreign investor who decided not to invest in Russia, because Russia doesn’t have this or that tax, or doesn’t have this or that tax break.  Quite a few of them decided to make an investment because the Russian tax system is relatively attractive, if you compare it to other BRIC we are at par if not ahead of some of the BRIC countries.  Especially if you look at flat personal income tax of 13% – I don’t think any other country can praise itself for having such a liberal personal income tax rate.  Similarly a 20% corporate tax rate – very, very liberal.”

RT:  Very attractive.  We are talking about foreign investors, what about local companies?  For local companies developing that has got to be something to look forward to.

PM:  “For local companies I don’t think there is a disagreement between foreign companies and local companies as to what is the main expectation from the Russian tax system. Overall for the Russian investment climate, every body starts looking for predictability.  People want to understand if they make an investment decision, whether it is local business or foreign business, and they build a business plan paying X amount of tax.  This is exactly the amount of tax they are going to pay.  If they expect to recover VAT from the budget, within say 3 months, they should be able to get it in 3 months rather than, you know, next 6 years, maybe.  Same with permits.  If somebody applies for a license and the legislative tariff for the license is 3 months, they actually need to get it in 3 months rather than if and when it happens.”

RT:   So we are talking about changing the bureaucracy and actually making things happen, and making things simpler for investors?

PM:  “We have done enough surveys among foreign and Russian businesses as to what is the major impediment for making business with Russia – bureaucracy is the number one by far.  Actually the tax system is about number 4 in the list.”