Head of HR administration at BDO Unicon Outsourcing
When entering the Russian market, foreign companies are often unprepared for its realities. What surprises and annoys foreign entrepreneurs, complicates their operations and even makes them leave the market
Increased document flow
In Russia, companies have to prepare and submit much more documents to regulatory authorities than abroad. For example, in European countries having an invoice is enough to confirm expenses with the tax authorities. In Russia, a business person is required to provide at least the certificate of services rendered or the commodity bill of lading and invoice. If these documents are unavailable, the tax authorities will consider the company to have understated its income tax base.
At the same time, it is important both to obtain primary documents from the supplier, and to check whether they are properly drafted. For example, the certificate of services rendered shall contain all the details provided for by the accounting law, as well as a detailed description of the services rendered. Inspection authorities often require documents to be attached to the certificate to confirm that the order has been fulfilled. For example, once a design agency has created an advertising banner layout for the company, the former shall provide the tax authorities both with the certificate of the services rendered, and a photo of the completed layout, sealed and signed “approved”.
Such complexities often come as a surprise to foreign businessmen.
Controversial situations
Russian legislation is not always transparent and unambiguous, so it is often challenging for companies to comply with its requirements.
Thus, starting from January 2019, foreign suppliers of electronic services for Russian companies shall pay VAT for these services at their own cost. In April 2019, the Federal Tax Service introduced simplifications for foreign companies and issued an explanation that the Russian customer may voluntarily become a tax agent.
However, this decision was contrary to the Russian Tax Code. Moreover, such explanations are only of advisory nature: all risks associated with their practical application are borne by the company itself.
It is not easy for foreign companies to navigate in such nuances of legislation and law enforcement practice. As a rule, the ways to address current business challenges that bear the least risks are more expensive. For example, in the situation with VAT on electronic services, the companies should register for tax purposes in Russia rather than pay fines or prove their case in court.
Counterparty Due Diligence
Foreign entrepreneurs do not always see a need for an extra due diligence of their counterparties before signing the contract. The contract seems to envisage the liability of the parties and the penalties. What could go wrong?
However, companies operating in Russia need to apply a responsible approach to contractors’ due diligence: this allows them to protect themselves from working with a fly-by-night company, as well as from fines for dubious transactions.
Case
A foreign company customer stopped paying rent for expensive equipment. He was obliged to pay the debt, but he withdrew all the funds from his accounts and declared himself bankrupt. As a result, the foreign company filed many lawsuits, incurred huge losses and left the Russian market.
Difficulties with personal data storage
According to the Russian law, all personal data of Russian citizens shall be stored on the territory of the Russian Federation. Breach of the law implicates a fine from 1 million to 6 million rubles for a legal entity, or a fine from 6 million to 18 million rubles for repeated breach.
However, many foreign companies need to use cloud systems, such as Workday, for personnel management at the global level. Therefore, representative offices of Russia-based companies have to spend extra funds on the services of providers, which can set up a system of data exchange between the Russian office and this service.
HR record management
The laws of most countries being home to companies set up in Russia do not envisage starting and keeping all documents on hiring employees, business trips, vacations etc for organisations.
In Russia, nearly every single employee’s movement shall be documented. Besides, HR electronic document management systems (EDMS) are not yet widely spread in Russia. According to Deloitte, only 17% of Russian companies used EDMS in 2019. Thus, 53% from them backup all electronic documents in hard copies.
Therefore, foreign companies have to get used to the fact that running a business in Russia is only possible provided they have an HR administration department, which has nothing to do with HR management, and it is also necessary to store a large number of paper documents.
