The Taxing Business of Joined-Up Government
By Tom Stansmore
For those who have been employers in Russia, it is common knowledge that pregnant women and young mothers are the most protected of all groups under the Labor Code. Not only is it virtually impossible to dismiss them, but they also enjoy fully compensated extended maternity leave for up to three years. I should probably point out now that in no way is the intention of this article to disparage this group or the rules protecting them. As the general director of an outsourced accounting firm, it is my (honest to god) pleasure to work with many Russian women. On occasion, the inevitable joyous event occurs, babies are made, and my employees need time off for the maternity process and, when the timing allows, we welcome them back when they wish to restart their professional careers. Although this is a requirement of Russian law, I’d like to think that I would do the right thing anyway. The inspiration for this article came when I questioned one of my senior accountants about an official looking letter on her desk. She explained that the letter was a request by the tax authorities to correct a personal tax declaration in which she had deducted the costs associated with the birth of her daughter. These costs, the letter suggested, could not be used to reduce the taxable base. The Russian Tax Code provides that treatment granted by medical establishments of the Russian Federation are a deductible expense for personal income tax purposes if the amount of the services is below 38,000 rubles ($1,320). In cases where the cost of these services is above this amount, there is an additional provision stating that: “For expensive types of treatment in medical establishments of the Russian Federation, the amount of tax deduction shall be accepted in the amount of actually borne expenses. The list of expensive types of treatment shall be approved by a decision of the Government of the Russian Federation.” For my accountant, the correspondence with the authorities started when she got a formal response regarding her personal income tax declaration. The letter, received in August of this year, stated that because the birth (which cost 20,000 rubles) was without complications and therefore not included in the list of expensive types of treatments, she was not entitled to the deduction. In brief, the authorities had applied an incorrect provision of the Tax Code to deny a refund on income tax paid on fees charged by the maternity clinic. The amounts are mostly symbolic in nature (she is claiming a refund on the income tax paid on the 20,000 rubles, which amounts to all of 2,600 rubles). Nevertheless, we have a legal system that is justifiably geared to protecting young children and the mothers who look after them and obliges business to finance it, yet the authorities themselves deny these benefits to those who need them the most. After receipt of the first letter my accountant called the authorities and was told that it was a position of principal that the costs of births not be deductible (at least those without complications). In summary, they were forced to take the awkward position that a birth without complications is not a medical treatment and therefore not a deductible expense. My accountant then responded with a formal letter disagreeing with the position of the authorities and recently received the second response stating the same position as in the first: a birth without complications is not a medical treatment. I’ve recently become a father for the second time in this country and attended the event. To us laymen (and women) out there, a birth sure seems to be a medical treatment of some sort. It takes place in a birth clinic where there are doctors and nurses, the clinic has all the hallmarks of a medical establishment with machines to monitor the mother and the baby. Depending on the situation, an anesthetic may be administered to the mother (but refused to the father), there are special visiting hours, everyone (including visitors) has to wear medical face masks and special gowns to prevent contamination of the place. It sure seemed like a medical center when I was there. It is apparent that the authorities themselves do not believe in the validity of their own position in this case and with additional correspondence we are quite certain that my accountant will receive the 2,600 rubles. Unfortunately, this is a common tactic applied by the authorities — we see it in relation to VAT and corporate profit tax declarations all the time — who do not believe that taxpayers are sufficiently confident of their positions or willing to spend the time and resources necessary to stand up for such deductions. The reason I’m writing about this and the reason my accountant pursued the issue for as long as she did has nothing to do with 2,600 rubles. It’s about the principal. The authorities in this country are notorious for piling on documentary requirements that strangle small businesses and adding to the “us versus them” nature of the system. Here, however, is a situation where the very people who are supposed to be the beneficiaries of the system are caught in the same mentality that condemns it from evolving into something better. Tom Stansmore is the general director of Emerging Markets Group.
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