Since Russia’s emergence as a market-based and globally integrated economy, the country has been successful in enacting rational legislation and creating commercial and institutional structures that favor the implementation of software outsourcing agreements. Binding and enforceable, these have allowed the industry to grow and operate efficiently. The advantages of Russia as a destination for managed services outsourcing, locating IT companies, and Russian software development far outweigh any perceived shortcomings.
Russian Regulations Software Industry
As a major international power and one of the world’s leading developing economies, a comprehensive set of rules and regulations govern the way IT and outsourcing business is conducted to protect both investors and employees. The country is party to major international treaties and a member of the Group of Eight (G8), the Council of Europe, the Organization for Security and Cooperation in Europe (OSCE) and is in the process of negotiating accession to the WTO. It has been among the list of most improved economies across three of its annual surveys according to The World Bank and the International Finance Corporation’s Doing Business 2012: Doing Business In A More Transparent World.
Despite a continuing, long-term positive trend towards better business practices, opening a business in Russia still poses significant potential risks. Russia is consistently ranked among the worst countries for ease of doing business as compared to good practice economies being ranked 12th out of 183 in 2011 according to World Bank statistics. Despite incremental year-on-year improvement, the burdens the state places on business make it vulnerable to corruption. In addition to potentially ruinous requirements that Russian citizens occupy key positions within a company, many essential functions are both cumbersome and expensive to perform.
According to the World Bank, recent positive change includes legislation affecting cross-border trading that reduces the number of documents needed for each export or import transaction and lowering the associated cost. In the area of contract enforcement, Russia made ﬁling a commercial case easier by introducing an electronic case ﬁling system in 2011.
Negative change is seen in the ever-evolving tax code, which increased the social security contribution rate for employers in 2011 while also making pension contributions mandatory for foreign employees on contracts of more than six months.
The Russian software development and managed outsourcing sectors benefit from the country’s ranking above other BRIC countries, and even some developed economies such as Japan, in the area of contract enforcement, with an overall ranking of 13 by the World Bank. The country was also singled out by the World Bank for good practices in making it easy to enforce contracts by maintaining specialized commercial courts.
Based on statutory law rather than case law, the Russian legal system conforms to the standards of international law. Once ratified by the Russian Federation international treaties and agreements are considered part of the domestic legal system and supersede domestic legislation. The cross-border movement of financial and investment resources, foreign specialists and labor, and intellectual property are all regulated by standards of international economic law. As a result, contracts between Russian IT outsourcing service providers and foreign businesses will be treated according to international law in most important aspects.
Russian labor law is based on the model of Soviet labor law. As the state was the main employer as well as the author of the laws governing employment, the Soviet Labor Code provided workers with a wide range of protections. The overabundance of legislative regulation is historically typical for Russia. Like most civil societies, the Russian Labor Code prohibits discrimination on any basis, offers protection when a job is lost, specifies work safety and guarantees prompt and accurate payment of wages. In many cases, however, it goes much further, regulating things like career advancement and minimum and vacation time requirements. While an employee’s guarantees and protections enshrined in the Code are relatively limited, they are mandatory and strictly enforced.
For more detailed information, see the section on the Labor Code.
Recent legislation had specifically targeted the reduction of bureaucratic red tape in order to foster a regulatory climate much more conducive to international business. While in the past many foreign investors were concerned by a perceived lack of adequate legal safeguards as well as high levels of corruption, the government has recently taken measures that make the lessening of corruption and bureaucracy a key priority.
The country’s Open Government initiative and its Anti-Corruption Council both aim to reduce corruption with varying degrees of success. A law requiring government officials and their family members to disclose their personal holdings aims to provide transparency and seems to be having modest success. Ten percent of those who filed a declaration in 2011 were found to have provided false figures, up from zero the year before. More recently, a law came into effect that oversees government officials’ purchases and requires that anything with a cost of more than triple the family income be subject to scrutiny.
Russia’s copyright laws provide protection for software, images, music and video, and extend to protect copyrighted material once digitized. This is in line with most Western nations’ stance on the matter and Russia is a party to all major international agreements and conventions on intellectual property. Recent changes have provided a harmonized approach to patents, trademarks and copyright issues, and replace all previous legislation in these areas. The new laws introduce clear legal terminology, expand intellectual property rights, resolve issues of conflicting laws and generally strengthen protection for copyright holders.
In the area of IT software outsourcing, copyright of intellectual property developed by a paid employee belongs to the company that employed the worker. In order to provide foreign clients with the required level of IPR protection, many Russian outsourcers set up headquarters outside Russia with their Russia-based delivery centers becoming fully owned subsidiaries.
For more detailed information, see the section on IP.
A particular characteristic of fiscal policy in Russia is that taxable income is based in on budget receivables. Most of the taxes are indirect and include VAT, sales tax, and excise duties. Russia levies higher tax rates than most European countries. That said, government support for small- and medium-sized businesses is at its highest levels since the emergence of Russia’s market economy status and the easing of tax burdens are beginning to significantly boost the attractiveness of outsourcing in Russia.
The Russian tax system is relatively new, and many of the taxation models that are standard in most developed economies are just beginning to emerge. As a result, a significant percentage of the responsibility for the payment of social taxes rest with the employer, representing the single biggest expense of any business incorporated in Russia. Because revenue for these programs is generated exclusively through withholding tax, employers have little chance of escaping the payment of these costs. Recent legislation specifically targeting the Russian software industry and outsourcing vendors, however, has removed a significant barrier to a company’s growth by allowing companies involved in high-tech industries to defer contributions for up to ten years.
As new concepts are embraced by the Russian authorities, they are often applied differently than in the West, or in other countries with developing tax systems. Current tax law makes a distinction between a foreign-owned branch operating in Russia and a subsidiary. The transfer of funds between a branch and an overseas head office are not considered taxable income or deductible expenses, and as such are not subject to withholding tax. Conversely, a Russian subsidiary of a foreign legal entity is considered to be a domestic taxpayer and the transfer of funds between a subsidiary and its parent may be considered taxable income and subject to withholding tax.
For more information see Taxation Information.
- The World Bank and the International Finance Corporation. Doing Business 2012: Doing Business In A More Transparent World. Washington DC: International Bank of Reconstruction and Development/The World Bank, 2012.
- Masha Charnay. Not Ready to Throw in the Towel. Russia Beyond the Headlines. Moscow, March 27 2012.
- The World Bank and the International Finance Corporation. Doing Business Economy Rankings 2012. Washington DC: International Bank of Reconstruction and Development/The World Bank, 2012.
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