Standard risks identified during payroll and payroll taxes review

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1 Standard risks identified during payroll and payroll taxes review Global Compliance Services Mach 2014

2 Payroll assessment and payment Taxation of severance pay upon dismissal by consent of the parties Non-compliance with the deadline for paying accident and work-related disease (AI and WD) insurance contributions Art. 22 of Fe deral Law No. 125-FZ of 24 July 1998 Non-compliance with the PIT payment deadline Art of the Russian Tax Code, Art of the Russian Tax Code, Art. 75 of the Russian Tax Code The Company does not levy insurance contributions, A I and WD contributions on the severance pay totalling 3 average monthly salary; The Company incorrectly determines the amount within the 3 average monthly salaries which is not su bject to PIT. We recommend that the Company assess contributions on the total severance pay upon dismissal by consent of the parties. To determine the PIT exempt amount, the Company shou ld consider the average daily earnings calculated for bu siness, rather than calendar days. The Company remits AI and WD insurance contributions by the 15 th day of the subsequ ent month. Failure to pay contributions on time may result in an interest of 1/300 of the refinancing rate being charged for each calendar day of the delay between the date when the salary is transferred to the employee accounts and the contribution payment date. We recommend that the Company pay insurance contributions at the day when the salary is transferred. In particular, if the Company pays salary upon dismissal, it shou ld remit contributions at the day when final settlements with the employee are made. The Company remits the severance pay, bonuses and vacation allowances at days different from the date when the base pay is transferred. However, the PIT imposed on the said payments is remitted to the budget at the day when the final pay is settled. Failure to pay tax to the state budget on time may result in (1) an interest of 1/300 of the refinancing rate being charged for each calendar day of the delay between the date when the said payments are transferred to the employee accounts and the PIT payment date and (2) a penalty in the amount of 20% of non-timely paid PIT. We recommend that the Company pay the PIT within the du e dates set in the Russian Tax Code: the day to pay the PIT imposed on the severance pay, bonu ses, advance vacation allowances should coincide with the days of the relevant payments. 2

75 of the Russian Tax Code The Company does not levy insurance contributions, A I and WD contributions on the severance pay totalling 3 average monthly salary; The Company incorrectly determines the

3 Average salary computation Accounting for bonuses and other payments cl. 5 (a) of the Regulation on the Specifics of the Proce dure to Assess the Average Salary approved by Re solution No. 922 of 24 December 2007 issued by the Russian government When computing the average salary for the annual leave and business trips, the Company incorrectly accou nts for bonu ses and improperly records payments for working overtime and working on weekends and holidays during bu siness trips. This results in either increased or decreased payments based on the average salary. We recommend that the Company analyse the average salary computation algorithm, and introduce relevant changes in the computation methodology, if required. In particular, the Company may introduce new assessment types Payment and additional payment for working on weekends/holidays during business trips, Working overtime during business trips. Accounting for social payments para 3 of the Re gulation on the Specifics of the Proce dure to Assess the Average Salary approved by Re solution No. 922 of 24 December 2007 issued by the Russian government The Company includes meal allowances into the average salary computation base. Meal allowance is a social payment and should not be included into the average salary computation. The Regu lation on the Specifics of the Procedure to Assess the A verage Salary sets out that social payments and other non-payroll payments (financial support, meal allowances, travel costs, trainings, utilities, annual leave etc.) are not accounted for in the average salary compu tation. This results in the increased payments based on the average salary. Meal allowances should not be included in the average salary computation base no matter if they are fixed in labou r contracts and local documents. Recomputing payments based on the average salary The Re gulation on the Specifics of the Procedure to Asse ss the Average Salary approved by Resolution No. 922 of 24 De cember 2007 issued by the Russian gove rnment The Company does not recompute the average salary after reporting the annual leave/business trips for the previous periods. The Company incorrectly determines the compu tation period for calculating future vacations. This results in either increased or decreased payments based on the average salary. If the payroll computation includes annual leave/business trips/sick leaves for the prior periods, the Company's accountant should review and, if required, recalculate the average salary for the periods after these events. We also recommend that the Company enhance control over the computing chain for the annual leave payments, if they are paid in advance in the month preceding the event. In particular, the future period vacation payments shou ld be adjusted upon assessing the salary for the cu rrent period. 3

records payments for working overtime and working on weekends and holidays during bu siness trips. This results in either increased or decreased payments based on the average salary.

4 Risk related to the Russian labour law requirements (1 of 2) Lack of payment/failure Payment for work 1 to provide additional 2 during business trips days-off for working on weekends Art of the Russian Labour Code, Art. 153 of the Russian Labour Code Art. 167 of the Russian Labour Code Irregular working hou rs are set to employees. A ccording to the timesheets used to bill clients, employees work on weekends/holidays, but do not receive any payment for this work or additional days off. V iolating requirements set by Art and A rt. 153 of the Ru ssian Labour Code may result in the administrative liability to the Company and its officials. To avoid potential claims by supervisory authorities and employees and escape liability for breaching the Russian labou r law, we recommend that the Company amend the procedu res for engaging employees in working on weekends/holidays and review the compensation procedu res. The Company does not perform payroll computations du ring business trips based on the average salary; The Com pany neither pays for nor provides additional days off for the departure/arrival days falling on weekends. In this situation: Employees may claim recalculation of payments for the bu siness trip periods based on the average salary; Employees may demand that the Company pay additional compensation for working on weekends; The em ployer should pay additional compensation for late salary payment. A dministrative and financial liability We recom mend that the Com pany pay for working during bu siness trips based on the average salary; execute orders on engaging employees to work on weekends if em ployees are travelling on business on weekends and holidays, and provide the relevant compensation. 4

A ccording to the timesheets used to bill clients, employees work on weekends/holidays, but do not receive any payment for this work or additional days off. V iolating requirements set by Art. 99.

5 Risk related to the Russian labour law requirements (2 of 2) Improper annual leave 3 4 execution and payment Art. 114 of the Russian Labour Code Lack of mandatory local regulations and other documents The Russian Labour Code The Company neither calculates periods during the annual leave based on the average salary, nor maintains the annual leave orders, nor keeps applications for the annual leave. In this situation: Upon dismissal, employees may claim compensation for u nused annual leave for the total period of employment with the Company; Employees/labour inspectorate may demand that the Company recompute all annual leaves based on the average salary and pay compensation for the late salary payment. A dministrative and financial liability. To avoid potential claims from employees and su pervisory authorities and escape liability for breaching the Russian labour law, we recommend that the Company docu ment annual leaves in full, and compute payments based on the average salary. The Company lacks local regulations and other HR documents which should be developed by the employer on a compulsory basis as required by law. These include: Payroll schedule (Art of the Russia Labour Code); Docu ments establishing the procedure for personal data processing (Art of the Ru ssian labour Code); V acation schedule (Art of the Russia Labou r Code); Docu ments establishing the payroll system (Art of the Russia Labour Code); Staff handbook (Art of the Russia Labou r Code). Lack of du ly prepared mandatory local regulations and HR documents may result in administrative liability to the Company and its management and other unfavou rable consequ ences. We recommend that the Company keep all mandatory local regulations and HR docu ments. 5

salary, nor maintains the annual leave orders, nor keeps applications for the annual leave.

6 Contacts Kirill Nikitin Partner Ekaterina Ryabova Director Julia Ramazanova Director Elena Moryakova Senior Manager Albina Nurtdinova Manager

com Julia Ramazanova Director +7 495 967 5474 julia.ramazanova@ru.pwc.

7 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication withou t obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Russia, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequ ences of you or anyone else acting, or refraining to act, in reliance on the information contained in this pu blication or for any decision based on it Pri cewaterhousecoopers Russia B.V. All ri ghts reserv ed. In this document refers to Pricewaterhou secoopers Russia B.V. or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate legal entity.

No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Russia, its

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