The Challenges of Russian Payroll
An insight into some of the most
critical issues employers face
regarding HR and payroll practices in
Russia
WELCOME
ROMAN USOV
Client Care
Unistaff Payroll Solutions
A graduate from the Department of Linguistics
The main
at Moscow Defense University, Roman has a
Master’s Degree in the English global
language challenges
and
a PhD in translation.
In a career development move, Roman joined
Unistaff Payroll Solutions in 2004. As head of
client support today, Roman covers all
aspects of customer care, including
developing customized HRA and payroll
solutions, taking care of clients’ needs with a
personal touch and managing complex
implementation projects.
WELCOME
ALEXEY EPANESHNIKOV
Tax and Law
Head of the Department
The main
Alexei is a very experienced consultant in the spheres of Labor,
global challenges
Tax and Administrative Law. Alexei has worked with many
multinational clients, including businesses with large employee
counts. He started working at Unistaff as a payroll consultant in
2002. In 2004, Alexei was appointed head of Unistaff’s Legal
Consulting Department. Under Alexei’s guidance, Unistaff has
built a very strong consulting team ready to help clients with
every aspect related to Tax and Labor Law. Alexei’s department
is responsible for timely tracking all legislative changes and
helping payroll accountants properly apply them to their
particular payrolls.
In the year 2007, Alexei became Member of the Russian
Chamber of Tax Consultants.
UNISTAFF PAYROLL SOLUTIONS — HISTORICAL PROFILE
1997 — Unistaff enters the Russian payroll market
1998 — Unistaff completes implementation of the Scala Version 3.1 payroll software
2000 — Unistaff completes implementation of the Microsoft Business Solution Axapta payroll software
2001 — Unistaff launches professional HR administration and consulting services
The main
2004 — Unistaff sets up an office in St. Petersburg
global challenges
2005 — Unistaff completes implementation of the iScala 2.2 payroll system
2002 — Unistaff enters Russia’s regional payroll market
2006 — Unistaff completes implementation of the Boss-Kadrovik HR Administration system and launches implementation of the Scala
Advanced Payroll web-based capability
2007 — Unistaff Payroll Solutions launches a strategic partnership with ANCOR
2007 — Unistaff implements a software as a service automation solution wrapped around BOSS-Kadrovik capability for its payroll
clients
2008 — Unistaff and ANCOR Leasing launch payroll and HR administration in Kazakhstan
2009 — Unistaff completes implementation and transition to Scala Advanced Payroll with a full web-based capability
2010 — Unistaff implements full web-based capability for its BOSS-Kadrovik SaaS solution
2010 — Unistaff launches Epicor’s advanced CRM solution for improved client service and client experience
UNISTAFF PAYROLL SOLUTIONS TODAY
25
Russian regions
150
specialists
300
corporate clients
The main
global challenges
30,000
payslips on a monthly basis
$100,000,000
payroll fund processed
Unistaff Payroll Solutions is 2nd in Expert RA’s Payroll Outsourcing Rating and 5 on the list of the largest
accounting outsourcing companies in 2010.
BUSINESS PROCESS OUTSOURCING
UNISTAFF
Payroll and HRA
The main
UNISTAFF global challenges
HR module as a Service
UNISTAFF
Legal Consulting Support
Our practice
• Serving multinational businesses from 1 to 5,000 plus employees
• Complex HR administration and payrolls for all types of employees
• Automation of all types of HR-related documents and reports guaranteed
• Fully-automated and easy time-keeping for on-site managers
• An advanced system of controls for data entered from various sources
• Unlimited number of types of payments in the payroll structure (currently over 2,500)
• Any custom HR and payroll reports to meet your internal needs (currently over 300)
• All compulsory monthly, quarterly and year-end HR and payroll reporting covered)
• Full administration of payroll bank accounts via electronic banking available
(Citibank, Raiffeisen, RBS, Unicreditbank, BSGV, Sberbank etc.)
• Automated integration of HR and payroll data into all types of ERP/GL
(SAP, 1C, Sun, Oracle, Navision, Scala)
PAYROLL: GLOBAL CHALLENGES
Globalization and consolidation — bosses wish to nose into the
pay slips handed to their personnel in another hemisphere,
thus creating demand for global and consolidated databases.
Tough deadlines – paydays are not easily deferred,
so calculations and reconciliations must be dealt with
in advance no matter what.
The main
global challenges
Mistake’s high-cost – underpayments will definitely
cause rancor, while overpayments may prove
to be unrecoverable.
Crossroads of laws – payroll is regulated by many different,
often conflicting areas of law, which will always include:
labor law, tax law, social security law.
Too often it takes a legion of initiates to get on top of all legal requirements.
Internet-wise – people rely more and more on the internet
for all types of information, which naturally pushes pay slips
and other payroll-related data online.
People first - unlike “inhuman” general accounting, payroll processing
entails day-to-day live communications with staff and CEO’s, being often
tinted with their personal whims and unexpected inconsistencies.
This may take a lot of time and energy but may not leave
the personnel unsatisfied.
Risk factors to consider
Ambiguous legislation
Lack of client-focus from the
authorities
Lack of process automation
High error
probability
YOUR BUSINESS
Dependence on one
specialist
Frequent changes
in legislation
Detachment from other
business processes
Gaps in salary levels
High risk of fines and
penalties
Widespread violations of labor law
Absence of employment agreements
with employees or part of employees,
including those with an employment
record prior to the entry into force of
the new Labor Code
Substitution of civil law contracts for
employment agreements
Inappropriate use of fixed-term
employment agreements
Failure to meet the existing salary
payment deadlines
Failure to meet the salary calculation
deadlines set for terminations and
annual leave (vacations)
Failure to meet the twice-a-month
salary payment requirement
Failure to follow the required HR
administration and HR paperwork
processing procedures
Failure to meet working hours and
leisure time requirements
Failure to meet 'non-standard'
employment requirements set for
individual groups of employees
Absence of local HR-related
regulatory acts (including safety
regulations) required by Russian labor
law
PAYROLL AND HR: RUSSIAN TRAITS
LABOR STATUTES AND REGULATIONS
General overview: updated, age-old, reticent and strict
Russia boasts a modern Labor Code drawn up
along the lines of the International Labor
Organization. Point 1b.
At the same time some common issues are
regulated by legislation enacted back in the Soviet
Union. For instance, vacation compensation on
termination is almost entirely regulated by
regulations enacted before the Second World War.
While the Labor Code does not present any clear
rules for regular payroll calculations, yet it carries
myriads of allusions like “fair pay” and “pay
according to employee’s qualification, complexity of
work, quantity and quality of labor spent”.
Non-compliance with any of the labor law statutory
rules is punishable under the Administrative Code.
Arrears in pay to workers may be a crime under the
Criminal Code.
PAYROLL AND HR: RUSSIAN TRAITS
LABOR STATUTES AND REGULATIONS
Employment contracts
• Written employment contracts must be issued for each employee.
The employer’s copy must sport the employee’s signature.
Employment contract must include statutory required clauses, sheer absence
of which may lead to penalties for the employer.
• Following the International Labor Organization the Labor Code allows only
a limited list of grounds for fixed-termed employment contracts; generally
all employment contracts must be for infinite period.
• Substitutes for absent employees are allowed to work under fixed-termed
employment contracts, top CEO’s and chief accountants may also be so
employed. Apart from this there is almost no valid legal ground for
a fixed-termed employment in a common company.
• Apart from labor law employment contracts, personnel may in some
cases be employed under civil law contracts. Civil law contracts imply
a slightly less tax burden down by apr. 3,1 %. This is due to the clause
that civil law contracts are not subject to the insurance contributions payable
to the Social Insurance Fund. The civil law contracts must be expertly drawn
to stand out from employment contracts. If not, the authorities will claim the
levy to level up with employment contracts.
PAYROLL AND HR: RUSSIAN TRAITS
LABOR STATUTES AND REGULATIONS
Remunerations
Pay in rubles
The Labor Code quite unambiguously sets forth the
requirement to make payments in Russian rubles.
Remunerations in employment contracts are also
to be set down in rubles.
There is no ready exception for foreign nationals.
Usually, in order for a foreign national to receive a fixed
amount in a foreign exchange first a conversion
is made from the foreign exchange to rubles for the
employment contract, when rubles are paid out then
a reverse conversion is made in the bank, then the original
amount in the foreign exchange is compared
with the actual amount in the foreign national’s bank
account to see and compensate or sometimes withhold
the difference at an agreed date.
Regular pay
Salaries and wages must be paid not rarer than once every half a month. All due
payments must be made the day the employment is terminated. These rules may
under no circumstances be altered by an agreement between employer and
employees.
PAYROLL AND HR: RUSSIAN TRAITS
LABOR STATUTES AND REGULATIONS
Average earnings – bulky calculations, recondite results
Despite of being mainly reticent about mundane payroll calculations, labor regulations
are verbose about so called “average earnings” — an average pay calculated on the
basis of the period of 12 months or 24 months for some state
social benefits. The average earnings are paid during law-specified periods like
vacations, sick leave, business trips, etc.
Having the end of protecting employee’s pay during these periods, the bulky average
earnings calculations often result in unexpected amounts hardly comprehensible by
personnel and quite annoying when below the usual pay.
Multiple leveling payments are often offered by employers to compensate the negative
differences.
PAYROLL AND HR: RUSSIAN TRAITS
LABOR STATUTES AND REGULATIONS
The work time arrangement
• The most common work time arrangement in Russia is 5 day long work week from Monday to Friday with Saturday
and Sunday being days off. A work day thus lasts 8 hours; lunch time is on top.
• Overtime work compensation is paid at 1,5 the rate for the first two hours and 2 times the rate for the hours over the two.
• In order to avoid having to pay for overtime so called “unlimited work day” arrangement may be set for any employee
in the employment contract. If done so, not less than 3 calendar extra days of vacation shall be granted to the employee.
PAYROLL AND HR: RUSSIAN TRAITS
LABOR STATUTES AND REGULATIONS
Vacations
•
Any employee in Russia is entitled to the
uninterrupted 28 calendar day vacation
once per year.
•
Under no circumstances the number of
days may be reduced. If agreed between
employer and employee a vacation may be
split in parts, one part always being not
less than consecutive 14 days.
•
The timing of the vacation is set by
employer except for certain privileged
employees like pregnant women, their
husbands, minors etc.
PAYROLL AND HR: RUSSIAN TRAITS
LABOR STATUTES AND REGULATIONS
HR documents - special elaborated rules
HR documents must be drawn up following blueprints set by federal regulations.
Labor disputes are not uncommon in Russia. In the disputes the lack of proper HR documents will most probably
tilt the court ruling in favor of the employee.
Payroll calculations not supported by proper HR documents will have negative tax consequences not only for the
Personal Income Tax and Insurance Contributions but also for Value Added Tax and Corporate Profit Tax.
The regulated HR documents include:
•
•
•
•
•
•
•
•
•
•
Employment order;
Vacation Order;
Business trip assignment;
Business trip order;
Business trip certificate;
Attendance sheet;
Bonus order;
Average earning notice;
Payroll register;
and many other.
On top of the obligation to issue the formal documents, it is required to get them signed both by the employer
and employees, without which they may be regarded to be invalid.
PAYROLL AND HR: RUSSIAN TRAITS
LABOR STATUTES AND REGULATIONS
“Labor book”
One of the most formal documents that an employer must keep for any employment-contract
for an employee working over 5 days as their main employment is an employment register —
the so called ‘Labor book’.
Employments, transfers and discharges must
at the very least be entered into it.
It often becomes crucial evidence in labor,
tax and pension disputes.
TAXATION
PAYROLL AND HR: RUSSIAN TRAITS
TAXATION
Overview
•
Payroll calculations will imply calculating the Personal Income Tax and the Obligatory Insurance
Contributions.
•
For companies with over 100 headcount in one region “quota” shall be levied. “Quota” is a payment for
non-employed youngsters whose quota is 2% of the total headcount.
•
Payroll calculations form accounting and tax transactions that will be used for deduction from the gross
income records and corporate profit tax base, respectively.
PAYROLL AND HR: RUSSIAN TRAITS
TAXATION
Taxes and Obligatory Insurance – two sovereign realms
•
National social security in Russia is run by the state funds: Pension Fund for pensions, Federal
Medical Fund for medical care and Social Insurance Fund for state benefits.
•
The funds also used to run the insurance contributions for the social security. The insurance
contributions were paid to each of the funds along different rules. In 2001 the Unified Social Tax was
introduced to replace the incoherent administration of the insurance contributions by the funds with
the unified approach of one obvious manager – the State Tax Authority.
For almost 10 years the State Tax Authority had been administering the Personal Income Tax and the
insurance contributions under same rules of the bulging Tax Code.
•
However in 2010 the insurance contributions were handed back to the command of the state funds,
and the specific separate legislation was introduced, which made the Tax Code irrelevant for the
insurance contributions. This created the situation much like it was before 2001 that the Personal
Income Tax and the Insurance Contributions are managed by different state bodies and under
different nonadjacent laws.
•
Nowadays the Insurance Contributions are administered by the Social Insurance Fund for social
benefits and the Pension Fund for pensions and medical care. The Federal Medical Fund has no
administering authority so far. The personal income tax remains under administration by the State
Tax Authority.
PAYROLL AND HR: RUSSIAN TRAITS
PERSONAL INCOME TAX
Vague personal income tax residence refund rules
•
The test of residence is quite simple - staying 183 day in consecutive 12 months prior to
the date of income makes one a tax resident.
•
The tax paid at 30% rate during non-residence period in a year may be recalculated at
the 13% rate and the difference may be reclaimed if one becomes a tax resident in that
year.
•
However the refund rules are so vague that it causes a headache to the claiming foreign
nationals without tax consultants at their support.
PAYROLL AND HR: RUSSIAN TRAITS
INSURANCE CONTRIBUTIONS
Vague personal income tax residence refund rules
It is businesses that bear the burden of the insurance contributions and they pay them out of their own capital above
salaries into the accounts of the state funds. Employees do not pay them out of their paychecks.
When introduced in 2010, the insurance contributions were levied at the general rate of 26,2 % for one employee’s
income not exceeding 415 000 rubles (apr. 13 800 USD) for that year. The amount of that employee’s income
exceeding 415 000 rubles in the year was levy-free.
In 2011 the insurance contributions were levied at the general rate of 34.2 % for one employee’s income not exceeding
463 000 rubles (apr. 15 400 USD) for the year. The exceeding amount of that employee’s income in the year was levyfree.
In 2012 the insurance contributions are levied at the general rate of 30,2 % for one employee’s income not exceeding
512 000 rubles (apr. 17 000 USD) for the year. Any amount of that employee’s income in the year exceeding 512 000
rubles is subject to the levy at 10 % rate.
PAYROLL AND HR: RUSSIAN TRAITS
INSURANCE CONTRIBUTIONS
Foreign Nationals
•
Most of the foreign nationals seconded to Russia fall into two immigration law
categories:
o
o
“temporary staying” foreign worker;
“temporary staying” “highly-qualified” foreign worker.
•
“Temporary staying” foreign worker is the one that has neither permanent nor
temporary domicile in Russia.
•
Grossly speaking, a highly-qualified foreign worker is a foreign worker with
the salary not less than 2 000 000 rubles per year (apr. 67 000 USD) or
1 000 000 rubles per year (apr. 33 500 USD) for teaching professionals or
scientists.
•
The status is marked in the work permit. A highly-qualified foreign worker
status may only be granted to Russian for-profit, high-tech or educational
companies’ foreign personnel or foreign personnel in foreign companies’
accredited branches in Russia.
•
The insurance contributions levy depends on these categories to the great
extent.
PAYROLL AND HR: RUSSIAN TRAITS
INSURANCE CONTRIBUTIONS
Foreign Nationals
One of the major novelties of 2012 is that a “temporary staying” foreign worker’s income is
subject to the 22 % levy of the insurance contributions to the Pension Fund for the income
not exceeding 512 000 rubles (apr. 17 000 USD) for the year. Any amount of that
“temporary staying” foreign worker’s income in the year exceeding 512 000 rubles is
subject to the same levy at 10 % rate. This had not been the case in 2010 and 2011.
Just as before “temporary staying” foreign workers’ incomes are also subject to the
general immigration law non — sensitive 0.2 % levy to the Social Insurance Fund.
So far “temporary staying” foreign workers’ incomes are not subject to any other levy of
insurance contributions.
Important to point out is that if a “temporary staying” foreign worker is employed in Russia
under an employment contract concluded for a term of not more than 6 months their
incomes shall be exempt from the insurance contributions to the Pension Fund. Highlyqualified workers’ incomes are also so exempt.
PAYROLL AND HR: RUSSIAN TRAITS
TAXATION: NEGATIVE LISTS
Both for the Personal Income Tax and Insurance Contributions the following most common
pay items are not subject to levy:
•
maternity pay, child birth benefit and other social security benefits, except for sickness pay which is
taxed by the Personal Income Tax;
•
business trip compensations, except for daily allowances for business trips within Russia in excess of
700 rubles (apr. 23 USD), and 2500 rubles (apr. 83 USD) outside of Russia, which are taxed by the
Personal Income Tax;
•
other business expense compensations;
•
instruction and education costs;
•
some employer initiated medical insurance premiums;
•
some employer initiated pension plans contributions;
•
statutory severance payments except for unused vacation payment;
•
some relocations costs;
•
employer initiated welfare up to 4 000 ruble (apr. 133,30 USD)
•
employer initiated welfare up to 50 000 ruble (apr. 1640 USD) for a new born child
PAYROLL AND HR: RUSSIAN TRAITS
TAXATION: NEGATIVE LISTS
• Important to point out is that only payments under employment contacts or personal services civil law contracts are subject
to the Insurance Contributions. Payments to sale or rent contracts made to natural persons are not subject to the insurance
contributions levy.
• Unfortunately, compensations to
employees in kind such as
rented apartments, kindergarten
and school services are taxed
without any exception. This is a
strongly supported position by
the fiscal authorities.
• The majority of payments to
employees are deductible from
the corporate profit tax base.
However pay items must be
closely monitored for segregation
as items like gifts, employer
initiated welfare, personal
automobile compensations over
limits are usually not deducted
from the corporate profit tax
base.
PAYROLL AND HR: RUSSIAN TRAITS
TAXATION: NEGATIVE LISTS
Business expenses minutely regulated and closely monitored
•
Although business expenses are nominally levy-exempt, in reality the rules for
supporting documents are so detailed and onerous that some companies prefer to get
them taxed instead of doing the paperwork.
•
Cover up bonuses are usually paid out to employees by way of the personal income tax
compensation.
•
As a general rule, all expenses not supported by the proper documents must be
included in payroll calculations for taxation purposes. Inspector will first look into
business expenses to unearth non-compliance.
PAYROLL AND HR: RUSSIAN TRAITS
SOCIAL SECURITY
Social security benefits – bulkily regulated, fast-changing and arcane
•
State social security benefits are regulated by numerous rules. For example, parental
leave benefit is regulated by three statutes:
o Labor Code,
o State Child Benefits law 81-FZ,
o Sickness and Motherhood Obligatory Social Insurance law 255-FZ
and two regulations:
o State Benefits Calculation Regulations (confirmed 15.06.2007 # 375),
o Rules and Conditions for State Child Benefits (confirmed 23.12.2009 #
1012N).
•
On top of it, for example, Sickness and Motherhood Obligatory Social Insurance law
255-FZ has undergone 7 significant amendments since 2010.
•
Some of the clauses in the laws are so unclear that even Social Insurance Fund had
to recall its own interpretive letters and thus admit to a wrong understanding of law
(for example, see letters of 05.08.2011 N 14-03-11/05-8545, 23.12.2011 N 14-0311/15-16055).
PAYROLL AND HR: RUSSIAN TRAITS
SOCIAL SECURITY
Social security benefits – bulkily regulated, fast-changing and arcane
The general legally set tendency is to increase the benefits on the yearly basis. The
benefits amounts vary from the small pregnancy registration benefit that amounts to just
465 rubles 20 kopeks (apr. 16 USD) to the substantial one-off maternity leave payment of
up to around 168 000 rubles (apr. 5 600 USD) on average.
The list of the most common benefits administered through the employer include:
•
Pregnancy registration benefit – 465-20 rubles (apr. 16 USD);
•
Maternity leave - apr. 168 000 rubles (apr. 5 600 USD);
•
Child birth benefit – 12 405-32 rubles (apr. 410 USD);
•
Parental leave – not more than apr. 14 625 rubles per month (apr. 485 USD);
•
Sick pay - not more than apr. 36 500 rubles per month (apr. 1 220 USD);
•
Care after Sick pay - not more than apr. 36 500 rubles per month (apr. 1 220 USD);
•
Industrial accident sick pay - average earning per month.
PAYROLL AND HR: RUSSIAN TRAITS
Q&A
Does the residence test for the
Personal income tax depend on
the nationality of the employee?
No, the residence test is only based on calculation of 183 days in a
consecutive 12 month prior to the date of income both for Russian
and any other nationalities. However some international tax treaties
may alter the taxation, as is the case with Belarusian nationals who
enjoy 13 % rate from the day they have an employment contract for
more than 183 calendar days in Russia.
Do immigration rules affect
taxation?
Yes, they do:
May an employer compensate
the Personal Income Tax to a
CEO, for example?
•
the Personal income tax: If non-residents pay the tax at 30 %
rate, “highly-qualified” non-residents pay the tax on employment
income at 13% rate;
•
the insurance contributions: temporary staying highly-qualified
foreign nationals’ incomes are not subject to the levy to the
Pension Fund. Incomes paid to temporary staying foreign
nationals not recognized as “highly-qualified” according
to immigration rules will be exempt only if the employment
contract term does not exceed 6 months. The 0,2 % levy will
always be paid to the Social Insurance Fund.
Legally it is forbidden. Whoever covers-up bonuses are widespread to
compensate the economic impact of the Personal Income Tax.
PAYROLL AND HR: RUSSIAN TRAITS
Q&A
How do I compensate my
employees for businessrelated expenses?
Some expenses like business travel may be easily compensated
following more or less clear rules. However, hospitality expenses
and business car issues are much trickier areas, which may require
a special tax planning arrangement.
May an employer use a
payroll service provider
to pay salaries and
taxes?
Russian law does not allow a payroll service provider to pay
salaries and taxes for other companies from the provider’s bank
account. However, a separate arrangement with a bank can be put
in place where a company opens a special bank account for salaryrelated payments, and a payroll provider is given access to this
account via internet-banking. In this case, the provider can take
care of all payroll-related payments, but the payments will be made
from the company’s account, not the provider’s.