22 Million Self-employed Russians Don't Pay TaxesStaff author: Adilia S.

An estimated quarter of the working age people in Russia do not declare their income. They work in the shadow economy. It means that 22 million Russians don’t pay taxes, social and medical care contributions. Out of 75 million people of the working age in Russia only 48 million pay taxes on their earnings in full, Lenta.ru reports.

The numbers are substantial. It’s hard to calculate how much money the Russian budget loses every year due to undeclared earnings. If we assume that an average self-employed worker earns 30 thousand rubles (USD $440) a month, then the share of unpaid income tax would be over a trillion rubles ($15 billion). That’s comparable with the total Russian budget deficit of USD $21.7 billion (1.5 trillion rubles).

Self-employment in Russia

Boris Titov, the Presidential Envoy for the Rights of Entrepreneurs, asserts that people who operate their businesses illegally should be encouraged to legalize their activities. A good idea but hard to implement.

Titov suggests to create of a special organization for self-employed people that will promote development of Russian entrepreneurship and small business. The share of small businesses in Russia is only 20%, which is very low as compared to European countries.

Self-employment in Russia

The share of small business in Russian GDP leaves much to be desired. Source: Forbes.ru

Titov says the process of registration for the self-employed should be made easier, so it doesn’t create too many problems to register for remote Internet workers who are now officially unemployed.

Rostrud (Russian Federal Service on Labour and Employment) officials even consider a new tax for citizens who are officially unemployed, in order to mitigate this issue.

It reminds the Soviet Union period when a person of the working age could be criminally prosecuted for being unemployed. Every adult in the USSR had to work or study until they reached the retirement age. Not working for several months would cause criminal prosecution. For example, Nobel prize winner writer and poet Joseph Brodsky had been convicted under this law for “social parasitism” (tuneyadstvo).

As many experts say, the share of self-employed workers is constantly increasing in Russia and the trend will continue in the future. The society in Russia is changing. Many people are working remotely through the Internet. The number of Russians working as programmers, designers, application developers, translators, copywriters is growing, especially due to the difficult economic situation in the country.

The major obstacle that is preventing people from declaring their real incomes is the current Russian tax legislation. It’s out of date and doesn’t have provisions for freelancers.

Freelance jobs.

Self-employed workers doing freelance jobs online comprise a large part of people who don’t declare income for tax purposes in Russia.

Tax Evasion Roots

It is fair to say that no one would like to live in fear of being convicted of tax evasion or left without a pension fund for the old age. So, there must be some serious reasons why people take such risks.

  1. Russian Tax Legislation

Tax legislation in Russia is complicated and unclear. Even lawyers find it the most intricate and complex area, leave alone the businessmen. It lacks established assessment practices and may be subject to varying interpretations. Moreover, it changes at least once a year, new amendments being added or regulations introduced. That’s why it is extremely hard to follow it and find the most suitable way of taxation.

The majority of people have no idea how to register as a self-employed entrepreneur and how much taxes they will have to pay.

From the other hand, some people think that the problem is not in the tax rules. Tatiana Sanarova, a senior associate of the European legal services, says that Russian businessmen have no one to blame but themselves for their legal nihilism. They seek assistance of lawyers too late when the majority of the mistakes are made and almost nothing can be done to fix them. They should be aware of the existing tax laws and consult with lawyers regular.

Nevertheless, the legislation could be more clear and simple for people to understand. From my point of view, it is too difficult to grasp. I looked through a number of websites giving the information about the taxes for small businesses. All the taxes are divided into groups according to the size of the company and its type. Each group is again subcategorized into several groups and each subdivision has its own benefits or amendments, which have come into force or will be introduced the next year. Some amendments are not final and only applicable during some period of time. Isn’t that crazy?

Tax Crime Roots

Even lawyers consider Russian tax laws complicated.

  1. Bureaucracy

If an individual wants to register as an entrepreneur, he has to gather lots of documents and undergo a number of checks. It takes time and money. Besides the majority of small businesses are subject to several inspections a year and that also requires lots of paperwork and funds. Russian businesses feel suffocated under the constant checks by various regulators who are perpetually finding points of non-compliance in order to extract bribes, while compliance rules are complicated and change frequently.

Handmade jewellery.

Many Russian craft-makers would be happy to legalize their income if is wasn’t for the pressure from regulating authorities and frequent compliance checks.

  1. High Interest Rates

Average interest rates for small business loans in Russia start from about 15-16% a year, up to 20% annually. It’s hardly possible to start or develop a company under such conditions. If an average person needs a couple of years to develop a business in a western country, it may take about 10 years to do it in Russia. Businessmen take loans and can’t repay their debts for years. This is the reason why only 3,4% of all small and medium businesses have been on the market for more than 3 years. Most of the entrepreneurs think how to survive under such conditions and try to avoid taxes, which are not low.

The Russian government says that one of its goals is to promote entrepreneurship and self-employment as their share in the economics should be higher.

Tax Crime Roots

Interest rates for business loans start from 16% in Sberbank of Russia. Click to enlarge. Source: Sberbank.ru.

The authorities believe it’s important to implement some special programs promoting entrepreneurship and self-employment, particularly among young people.

By all means, it is necessary to provide assistance for self-employed and new businesses, but I’m afraid it can be almost useless. What is really needed is lower interest rates for business loans. This will inevitably lead to growth of new businesses. Why haven’t Russians succeeded in the creation of new and competitive mobile phones or computers so far? They were smart enough to participate in creating of modern technologies abroad. Because they simply didn’t have the possibility to do that at home. And the main thing here is access to funds for starting a business and, of course, clear and fair taxation rules.

  1. Lack of Information

The public should be aware of the existing taxation procedures. Most people lack information about how to legalize their income and if they really need to do that. Lots of Russians have additional small income but they do not declare it. Some people think that it will lead to more complications than advantages.

And, as it has been said, the legislation needs to be adjusted to give people the opportunity to be registered as self-employed for tax purposes.

Survey results on tax avoidance reasons

Survey results: Russian businessmen list the main problems they face.

Ivan Solovyov, a professor of the tax and finance department of the Financial University under the Government of the Russian Federation, states that the majority of self-employed people would be happy to legalize their income, pay taxes and social contributions. Solovyov says it’s time to simplify the taxation system for self-employed citizens. These people should be able to pay low social contributions (lower than entrepreneurs and small businesses). Besides, the process of registration should be made easier.

The experts believe that such measures will assist in overcoming tax evasion problems and encourage more people to declare their real incomes.

However, if taxes for self-employed are set on a high level, people will not be encouraged to move out of the shadow economy. This is the reason why registered businesses often pay part of wages to their employees in cash. High social contributions required on top of wages lead to employees preferring to pay remuneration in cash and employees not declaring their income correctly.

In short, the reasons why millions of self-employed workers in Russia don’t pay taxes are absence of a clear self-employed status in the system, high level of business taxes and social contributions required, complicated taxation rules, and unnecessarily frequent checks by regulating authorities.

Russian budget loses around trillion rubles a year.

Russian budget potentially loses about 1 trillion rubles (USD $15 billion) a year because self-employed workers don’t declare their income.

 

White Wages vs. Black Wages: Only 3 Million Ukrainians Pay Taxes in FullRead also:

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Olga
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Очень правдивая статья. Как бухгалтер я сталкиваюсь с тем, что под конец года (последние числа декабря) выходит около ста изменений в действующее законодательство. Я пользуюсь консультациями Турова В. Он не успевает переписывать свои семинары и брошюры в связи с новыми изменениями. Читаю профессиональные форумы бухгалтеров. Особенно трудно сейчас бухгалтерам Крыма. Они пишут, что очень сложно понять наше законодательство. из этого делаю вывод, что в Украине было проще. Почти каждый год нам меняют формы для отчетности, меняют даже коды налогов. Наверное они полагают, что у бухгалтеров без этого будет скучная и рутинная работа :).

Anna
Guest

In our country there is a huge problem with taxes, and it started not today. Not only with freelancers, but with each company, where the boss pays cache to his employees. Nobody can control the salary of such workers. And nobody pays taxes this way.

Nana27
Guest

All these facts described are typical for Russia and unfortunately, none of them is lie or fiction. Many companies in Russia work according to “black schemes”. They pay their employees hidden wages and thus do not pay any taxes since these wages are not mentioned in any accounting documents. In addition, usually the hidden wages are rather higher than white ones and lots of people take the money and keep silence. Until the moment, they find some legal work with a reported salary.

Vladimir
Guest

The situation that worries not only Russia but also almost all the countries of the former USSR. Unfortunately the transition from the Soviet system to the business and imperfect tax system gave space for financial fraud . And the social security system leaves much to be desired . A permanent change in legislation only exacerbates the situation

Lisa
Guest

Perhaps, self-employed people do not pay taxes properly. Although it is illegal. If this country can not provide the human work space and a decent salary, that it is entitled to claim? Taking taxes from craft-makers its really funny. Their earnings unstable and miserable.

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