Taxation Bill for Self-Employed Citizens in Russia: the Official Position of the RAEC Sharing Economy Cluster

On October 25th, the State Duma passed in its first reading a package of bills providing for the introduction of a new tax: the “Tax on Professional Income”. A pilot for this tax is planned to be introduced from January 1st, 2019 in Moscow, the Moscow and Kaluga regions, as well as in the Republic of Tatarstan. The new tax regime is aimed at individuals who work for themselves without employees and whose monthly income does not exceed 200,000 rubles (about 2,665 euro). The package of bills will also introduce fines for incomplete or late payment of the “Tax on Professional Income”.

Various estimates put the number of people in Russia who work for themselves, in other words fall under the definition of self-employed, at 13 to 20 million. Many of them use sharing services: online platforms which bring together providers and recipients of services. Examples being repair, delivery and cleaning services, educational services, and other services often provided on an “individual to individual” (peer-to-peer) basis.

We consider the defining of the status of self-employed and the introduction of a privileged rate of income tax for this category of citizens (4% for those providing services to individuals, 6% for those providing services to legal entities and individual entrepreneurs) to be an important step in allowing millions of Russian citizens to work on a legal footing. This will give them the opportunity to secure bank loans against officially confirmed income and to receive medical services through Compulsory Medical Insurance, and to use the other “everyday” services currently available to entrepreneurs and salaried employees.

In the meantime, on the introduction of a new entity subject to regulation – “electronic platform operator”, we would like to point out the need to take into account the differences between the business models of various sharing services, some of which do not participate in transactions between users, do not accept money for services and (or) commission on the costs of services, do not possess the relevant information regarding the parties and actualities of these deals, and who are, factually speaking, not in a position to identify users with sufficient accuracy or interact with them in the ways set out in the bill.

Furthermore, the Federal Tax Service’s authority to define requirements (criteria) of electronic platform operators are unfairly broad, insofar as requirements concerning those engaging in civil circulation, their rights and obligations can only be defined by federal legislation, while the tax authorities have a right to define the procedure of technical interaction with various organizations in instances stipulated by the law.

We suggest that the system for declaring profits and paying the tax for the self-employed be simplified as much as possible and that these functions be carried out primarily using online services.

Furthermore, we are convinced that it is important that lawmakers concentrate on positive inducements for self-employed citizens to “come out of the shadows”. A system of incentives needs to be developed: one of bonuses and tax deductions for citizens registered as self-employed; the proposed tax credit of 10,000 rubles suggested in the bill cannot be considered adequate incentive. Without positive inducements, this tax experiment has no chance of succeeding.

The articles on fines for those who don’t pay the tax on professional income on time or in full raises disbelief. Such measures will only serve to discourage people from registering as self-employed or put them off working for themselves, from going about their business. It should also be borne in mind that trials for a scheme for collecting new taxes may, with a great deal of certainty, be accompanied by technical faults, which means that even those who follow the exact letter of the law may find themselves threatened with fines.

We are confident that when amending the package of bills on the self-employed it is necessary to move away from an attempt to collect money “here and now” and to concentrate on the task of fostering self-employment over the long-term. It is precisely this task (providing favorable conditions for the activities of self-employed citizens) that is enshrined in the President’s May Decree and specified as an objective of those bills on the self-employed.

We suggest that the State Duma consider the special case of sharing services, to draw up a section on positive economic incentives (bonuses) for citizens registered as self-employed. We also propose removing from the bill the article on punitive measures – at least for the duration of the pilot scheme until the “Tax on Professional Income” is introduced throughout the whole of the Russian Federation.