A Direct Route to Russian Social Insurance Contributions

The economic crisis has hit Russia hard and left the government scrambling for ways to fill its budget.  Efforts to revive the Russian economy have taken a significant chunk out of the Stability Fund, Russia’s emergency funds for economic stability largely accrued from natural resource profits.  This vast amount of government spending has left the Russians eager to do a bit of spring cleaning and tighten up budget income sources.  This has led to a series of tax developments and increased tax enforcement.

One such effort has been the transformation of taxation for social benefits with the coming into force on January 1st, 2010 of federal law N 212-FZ “On Insurance Contributions to the Pension Fund of the Russian Federation, Social Security Fund of the Russian Federation, Federal Medical Insurance Fund of the Russian Federation and Territorial Medical Insurance Funds.”  Before 2010, there was a single tax for social benefits called “Edinnii Sotzialnii Nalog” (Unified Social Tax), which was collected by the federal tax revenue agency on behalf of the government.  Russia has now opted for a more targeted approach to this tax.  Instead of a single tax, the new legislation introduces employer payments to four separate funds: pension fund, social security fund, federal medical insurance fund and territorial medical insurance fund.

As a way of transitioning from a single tax to a series of contributions, the Russian government has set the initial tax rates:

• Insurance contribution to the Pension Fund – 20%
• Insurance contribution to the Social Security Fund – 2,9%
• Insurance contribution to the Federal Medical Insurance Fund – 1,1%
• Insurance contribution to the Territorial Medical Insurance Funds – 2%

While these new measures certainly have the effect of bringing insurance contributions into the realm of taxable income, which was not the case before the 2010 reform, the departure from a single tax approach may be more than just for bureaucratic convenience.  Whereas the government has in the past seen fit to collect tax to be poured into the general federal holdings, and then to be later allocated as per the Russian budget, payments to these four funds under the new legislation go not to a central federal revenue-collecting body, but to the funds themselves.

The direct collection of social taxes by the specific funds enables the organizers of these funds to have more immediate access to the money that has been raised, without having to jump through bureaucratic hoops in order to get the money from a central taxing authority.  Given Russia’s on-going difficulties with meeting the needs of pensioners, in addition to the stresses placed on the government purse due to the needs of the unemployed, any way to grease the wheels of these public programs is an effort worth applauding.

Also, this more direct structure fosters greater transparency in the tax collection process.  In a country still notorious for its corruption, transparency in a fragile economic state is of the utmost importance.  This should help foster more public confidence in the national economy.

Benefiting from this increased transparency, the government also is able to raise these tax figures to adjust the specific needs of the funds.  In anticipation of future needs, the government has already planned to raise the tax percentages in 2011 accordingly:

• Insurance contribution to the Pension Fund – 26%
• Insurance contribution to the Social Security Fund – 2,9%
• Insurance contribution to the Federal Medical Insurance Fund – 2,1%
• Insurance contribution to the Territorial Medical Insurance Funds – 3%

Of course, it remains to be seen how effective these changes are at improving the overall condition of social programs available to Russian citizens.

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