Special tax regulations for freelancers, i.e. individuals making their living on their own without engaging labor could be introduced in Russia already in 2019.
However, currently, Ministry of Finance of Russia is not planning to introduce full - scale new tax regulations alongside with other existing taxes for individual entrepreneurs, rather they will approbate it in the format of a pilot project which will presumably continue for 10 years according to Ilia Trunin, Deputy Minister of Finance, and will initially embrace the territory of four Russian regions: Moscow, Moscow region, Republic of Tatarstan and Kaluzhskaya region. It is not unlikely that this list will be extended if the Government of Russia takes the respective decision.
Compared to the existing patent system, registration as individual entrepreneur will not be a compulsory condition for the application of special tax regulations for freelancers. This status will not prevent from selecting this particular tax treatment, but it will be impossible to combine different tax regulations.
The main goal of special tax treatment for freelancers is to legalize incomes of the individuals working without status of an individual entrepreneur. Tax treatment is focused primarily on those who receive their income providing services to other individuals, for instance: tutoring, child minding, elderly care, house cleaning. The size of their income frequently corresponds to a small salary, which is easy to hide in contrast with the real salary subjected to a deductible tax from the source of payment. However, registration of an individual entrepreneurship and payment of the patent with a standalone payment of a fixed amount of insurance fees compatible with the size of income could be a frequent factor making individuals to avoid declaring their income due the obvious discrepancy between profit and losses.
There are plans to get freelancers out of shadow by reducing the tax rate for professional income and simplifying the way of tax calculation and payment. The following measures are suggested:
Firstly, to apply only 4% tax rate on professional income and 6% on income received from organizations for the sake of taxation neutrality against other tax regulations i.e. STS (Simplified Tax System) and PTS (Patent Tax System);
Secondly, to include insurance fees under tax rate on professional income in order to pay it as one payment; fees will be calculated only for compulsory medical insurance with 1.5% tax rate. As a result, it will reduce the load on regional budgets covering now expenses on compulsory medical insurance for non-working population;
Thirdly, to accept tax payments via mobile app and relieve freelancers from submitting tax declaration and other documents.
Thus, the improvement of payment discipline will be achieved by regulation of tax and administrative load and use of modern technologies.
In this context, in order to avoid abuse, restrictions on income ceiling and types of activities will be included in the terms of transition to tax regulations for freelancers. For the time being, individuals having an annual income up to Rb 2.4 million or no more than Rb 200.000 per month could be considered as potential targets of this tax regime while security trading, letting of nonresidential space, retail business and excisable production could be referred to activities falling outside these tax regulations.
New tax regulations could improve target taxation of small business in Russia because actually they vest each category of entrepreneurs with their special tax treatment along with other regulations, taking into consideration the specificity of the range of activity and nature of income. As tax system is focused on taxation of the undeclared incomes, the application of new tax regulations will lead to growth of tax revenues. However, level of population awareness of the new tax regulations and level of tax culture. i.e. moral, will play a significant role, as even a very low tax rate is not a guarantee of payment discipline in the environment where the tax payer is not aware of this tax rate or is aware but does not consider it as a motivation for tax payment. In addition, taking into consideration that tax regulations for freelancers provide a very low tax rate, they will attract a number of those tax payers who use or would use patent system of taxation of a higher rate and it will be resulted in the partial loss of patent tax revenues. Therefore, to be efficient, new tax regulations should initially involve those individuals who hide their incomes and prevent their transformation into the tool of tax minimization.
Vladimir Gromov, Candidate of Economic Sciences, Senior researcher, RANEPA Tax Policy Department