Russian Outbounds – How to Avoid Crime and Punishment?

Erika Campbell
Senior Tax Manager
PricewaterhouseCoopers

You need look no further than the first few pages of any newspaper to find that foreign nationals working in Russia continue to attract attention. How foreign workers and their employers comply with Russian tax, immigration and labor law is regularly under the microscope. Questions such as “Do they have work permits?” and “Are taxes being paid in Russia?” sound all too familiar.

Russian nationals on outbound secondments seem, however, to fly under the radar. This is surprising as it could be argued that there are as many if not more areas of exposure related to the deployment of Russian nationals abroad.

Moving employees around the world has never been straightforward. Be it for a short business trip or a longer-term assignment, there are a myriad of issues to consider. Forward planning and following guidelines to get the process right is essential — failure to comply with home and host requirements can bring adverse publicity to a business and potentially damage the brand.

It is often the home country implications that are overlooked as the temptation to focus on how to get staff on the ground quickly takes over.

The processes and best practices around managing inbound transfers to Russia are typically more developed than those in place for outbound moves. This may be partly attributable to the fact that it is a relatively new trend for Russian nationals to be assigned abroad for strategic, personal development or leadership deployments. Or is the real issue lack of awareness?

If this is the case and the issues involved are not being identified, “getting it right” becomes a real challenge.

As mentioned, having an employee working “away from home” throws up many questions, not least the question of which jurisdiction, or jurisdictions, has the right to tax the individual’s employment income. Accordingly, a good understanding of the personal tax implications is imperative to ensure that there are no surprises when it comes to determining the personal tax liability of an employee.

Currently, Russia enjoys a relatively low flat rate of tax and, where an individual receives income solely from employment, there is generally no need for the individual to become involved with the tax authorities since the correct tax is normally withheld at source. However, this all changes when working overseas. In addition to potential host country filing requirements, the individual may have to start filing Russian tax returns, for example, if the taxpayer loses residence in Russia or sells a Russian asset as a nonresident or, as a resident, is required to report worldwide income.

Not only will the concept of needing to file a Russian tax return be alien to the employee, but the logical questions that arise are as follows: Which party will fund any increased tax costs? Will third party tax assistance be provided by the corporate?

Some employers have formal expatriate tax policies that are especially important for Russian nationals working overseas, given that the tax rate in the foreign country will be higher than that prevailing in Russia.

Practice suggests, however, that few policies are in existence. If the personal tax treatment adversely impacts the employee, the employer can expect “noise” from a disgruntled assignee population, and there will be negative consequences for the business, such as demands for additional compensation or refusal to travel.

Other problematic areas are loss of pension entitlement, employment structures that are not tax efficient and the requirement for Russian nationals to register foreign bank accounts in Russia.

Clearly Russian outbound assignments present numerous challenges for the business, even in the home country. While the “out of sight, out of mind” philosophy is well practiced, it is perhaps not the best way to approach maintaining corporate relationships with expatriated staff.

Companies assigning Russian nationals abroad need to decide whether to focus more on mitigating exposures for the corporate and reaping the rewards of successful outbound secondments, or to continue running the risk.