Russian government agrees that the insurance payments that employers have to pay for their employees are prohibitive. However, the authorities are unable to decrease them instantly.
The government recognizes the fact that the amount of insurance premiums that businesses are required to pay for their employees are too high. However, it is extremely difficult to reduce the rates to a reasonable level without creating a gap in the state funds, minister of finance Anton Siluanov said in an interview with RBC. According to him, the mechanisms of compensation for the shortfalls in incomes to the social funds are to be worked out, and the reduction of payments to be thoroughly calculated. At the same time, maintenance of the budget balance is necessary, too.
The current tax burden on companies that hire employees is doubtlessly excessive, said Siluanov.
Under the current legislation, legal entities are obliged to pay insurance contributions for hired workers, which amount to 30% of the salary. A total of 22% of the money earned by an employee is transferred to the Pension Fund, 5.1% to the Federal Compulsory Medical Insurance Fund and the other 2.9% to the Social Insurance Fund. A preferential rate of pension contributions – a total of 10% of a salary -- is provided only for high-paid employees with salaries exceeding 1.29 mln rubles ($19,265.89) per year. Meanwhile, there is no requirement to pay to the Social Insurance Fund for the workers who earn more than 990,000 rubles ($14,785.45) annually.
Siluanov admitted that the fiscal burden on labor in the Russian Federation is not corresponding to the taxation of capital, as contributions from salaries do not confine to 30% of tax payments to the social funds. In addition, companies are obliged to deduct 13% of employees' salaries as an income tax. As a result, in order to avoid deduction of 43% of the earnings, the Russians commonly use the schemes of the so-called “gray” and “black” salaries (a small amount is paid officially, and a larger part is paid in cash, or the full amount is paid off the books, respectively), said Siluanov.
According to the estimates of the Federal Service for Labour and Employment (Rostrud,) the Russians earned 13.06 trillion rubles ($195,048,488,000) without paying taxes, which amounted to about 13% of GDP.
Siluanov made a reminder that the system of insurance deductions for economically active Russian citizens differs from many developed countries where these payments are made by employees themselves. However, a similar pattern is not likely to be implemented in Russia. Rostrud notes: according to the computations by experts of the World Bank and PwC Paying Taxes 2020, Russian medium-sized companies spent 36.6% of their commercial profit on the fiscal payments for their employees. The global average is half as low -- 16.3%, while in developed countries it is smaller by a factor of three. In Canada, employers pay 12.7% of profits for taxes on wages and salaries, 12% in the UK and 9.8% in the United States.
Siluanov assured that the authorities are seeking to reduce the fiscal burden on labor. First of all, it is necessary to find constantly functioning resources to shift the shortfalls in incomes to extra-budgetary funds. If the taxes on wages and salaries are merely reduced, the funds will instantly have gaps. Particularly, the Pension Fund will have the most serious problems. In monetary terms, each 1% of the deductions from wages and salaries bring in about 200 bln rubles ($29,869,600) to socially important funds, Siluanov notes. Correspondingly, the slashing of deductions to 20% will trigger a shortfall of 2 trillion rubles ($179,217,600,000.) In order to offset the gap, it will be necessary to push the federal treasury off the balance, which is totally unacceptable, said Siluanov.
He did not confirm or deny the information that if a part of benefits for oil and gas companies is canceled, the insurance premiums might be minimized. Last year, sources told the Vedomosti daily that it would be highly likely. In 2019, fiscal benefits for oil and gas companies reached 1.6 trillion rubles ($23,895,680,000,) while their current value will be even higher. Siluanov confirmed that Prime Minister Mikhail Mishstin's cabinet is planning a thorough review of effectiveness of the current tax preferences. As explained by Siluanov, the preferences that do not produce the anticipated results will be canceled. Insurance payments may be diminished even if a progressive rate of personal income tax is introduced. However, it cannot be introduced until 2024 under a moratorium on fiscal policy revisions. Siluanov indicated that the progressive taxation scale is sought by people, as it is a tool for restoring social fairness. He also warned that changes in the system of taxation will inevitably cause discontent in certain industries. For instance, while high-tech and innovative sectors prefer its revision, manufacturing corporations are interested in preserving the current patterns.