Elena Ignatova
The debate on unified social tax amendments to the Tax Code is one of the most important issues in Russian society. This is a crucial matter for millions of people with the lowest standard of living, and the impact of this new law causes frustrated opponents to raise several valid objections.
The lawmakers suggest replacing insurance premiums with a tax, which is in conflict with all social security laws and regulations. In addition, the Russian Constitution, that serves as a starting point for regulatory framework, is a basis for the legislation and a document with supreme legal effect.
For example, section 41 of the Russian Constitution establishes that medical aid in state and municipal medical care providers shall be offered free of charge using insurance premiums, i.e. the Russian Constitution guarantees the existence of the insurance system.
Insurance premiums are, in substance, totally different from tax payments. One need only look at the definition of the term ‘tax’ given in the Tax Code, Part I, Section 8,which states, «the tax is a compulsory individually non-repayable levy charged on legal entities and individuals by alienating their funds [that are either owned or in operating management] in order to fund the government and/or municipal agencies». The definitions, such as «non-repayable», «alienated» and «transferred to government ownership», undermine the underlying principles of social security. Insurance premiums are owned by the employee who pays them, rather than by the government. Social security constitutes an integral part of employment relationships. Insurance premiums represent a deferred part of wages payable upon the occurrence of an insured event (e.g. sickness, attainment of retirement age, etc.). This system is based on the employee’s personal interest in guaranteed social security and earmarked distributions, unlike «non-repayable» «alienated» taxes. Insurance premiums, in economic substance, are jointly owned by all interested employees. The employee becomes eligible for the right to get future benefits upon the occurrence of social risk, in respect of which the premiums have been paid. This matter needs separate consideration. An insured individual becomes eligible for the right, guaranteed by the Constitution, and subject to enforcement by relevant agencies within the social security system. In addition, the social security system envisages a joint and several liability, which is crucial: an employee paying insurance premiums provides for a pensioner’s right to pensions, a healthy individual provides for a sick person’s right to benefits, etc. Introducing the tax will deprive citizens of rights guaranteed by the Constitution, including rights that have been earned for the duration of the social security system when insurance premiums were paid.
The tax is a depersonalized payment which, under Section 286 of the draft Tax Code (Chapter 25), is intended for the provision of government pensions and medical aid. Insured persons raise valid objections to categories such as government aid or provision in cases where they are fully eligible for [free] medical services or pensions subject to payment of social insurance premiums. Under the social security system, the employee seeks prompt payment of insurance premiums by employers. Ideally, this should be done on behalf of each employee and contracts should be entered into for the benefit of each individual. Insurance funds must keep personalized records (broken down by name, individual) of premiums received and insured persons’ rights while employees and employers should be directly involved in insurance proceeds management. The depersonalized tax that is alienated for the benefit of the government will make all this impossible.
The next important issue that is not specified in the draft Part II of the Russian Tax Code is the source of unified social tax payment. Insurance premiums are charged to production and selling costs. This rule should stay intact and be clearly prescribed for the unified social tax. Otherwise, enterprises will be scapegoats after the first reporting period when tax authorities are likely to request companies to revise their balance sheets, deduct unified social tax from the cost of goods sold and pay it out of profits, thus increasing profits by at least 37% (in the amount of contributions to extra-budgetary social funds) and, consequently, adjusting upwards other profit-based taxes. Under such an approach, it is clear how budget revenues will be increased 1.5 times as much, as foreseen by initiators of the unified social tax.
The drafters of unified social tax amendments argue that tax authorities will collect insurance premiums better than [social] funds. However, there is no evidence to support this idea. On the contrary, the collectability rates are lower in those regions where insurance premiums are administered by tax authorities. For example, insurance premium collectability rates of government extra-budgetary funds reach 95-98%, while personal income tax rates of tax authorities is lower than 50%. The reasons for this are obvious. Under Part I of the Tax Code, when collecting insurance premiums, bodies of government extra-budgetary funds enjoy the same rights as tax authorities. In addition, collecting insurance premiums and maintaining monies are major functions of funds. There is a closed loop of cash flows from insurance premium payers to the specific recipient of benefits (pensions, medical services, etc.). Every stage of the scheme is transparent and subject to the control of numerous supervisory agencies. Budgets of social funds and their performance reports are approved by relevant laws and regulations of the Russian Federation and Russian sub-federal regions. Things are much worse in the [government] budget system. There is no feasible way of exercising control over numerous government and municipal budgets. Unlike the social funds, there is no communication between the agencies responsible for tax collection (tax authorities) and disbursement agencies. The mechanism and flows of budget monies are much more complicated. Everyone is aware of the fact that earmarked budget funds fail to reach their recipients. This results in regular delays of salaries and child welfare payments which will be followed by pensions, financing of medical care providers, wages of doctors and nurses, etc. after the introduction of unified social tax. The insurance premium collectability rate of extra-budgetary funds is so high, because funds deal with only one type of payment (unlike a tax inspector who deals with dozens of taxes). So they can exercise control over each payer on a case-by-case basis, perform efficient inspections, react promptly in case of payment delays and make sure that insurance premiums are collected. Tax authorities are unlikely to have professionals who are also qualified in insurance premium collection for social welfare purposes.
Undoubtedly enterprises will face serious problems if the unified social tax is introduced and tax authorities are responsible for its collection. Firstly, as was mentioned earlier, the source of unified social tax payments is not clear (it might not be possible to charge the unified social tax to the cost of goods sold). Secondly, no one has specified a mechanism whereby the social funds will transfer their insurance premium collection functions [to tax authorities]. It is hard to overestimate the importance and complexity of this mechanism. Enterprises will encounter registration and re-registration issues because registration numbers with social funds differ from those with tax authorities. No one has established payment order execution requirements, bank account numbers for wire transfers, reporting procedures and, above all, deadlines and procedures for filing reports. These are merely obvious and superficial issues. The lack of governing procedures will result in failure to meet payment deadlines and, accordingly, penalty fees. So accountants and managers will have additional headaches rather than a time saving process.
Members of the State Duma who unanimously vote for the unified social tax will also face problems. At some point, State Duma members will have to listen to their electors who do not receive pensions (i.e. the only subsistence of many families), and who can not receive free medical aid because of poor funding of medical care providers. Maybe, in due course we will have to come back to the social security system that exists all over the world, but much fewer people will be subject to insurance, and social insurance professionals will be already lost.
Elena Ignatova is the Deputy Executive Director of the Moscow city Fund for Compulsory Medical Insurance. She can be contacted by phone: (095) 952 6360.
The article represents Ms Ignatova’s personal views and not the opinion of ICAR. «Accounting Report» welcomes written comments on this very important issue.