After graduating from university, you began your career in Andersen, one of the world’s biggest consultancy firms. But after a few years, it went bust. You moved then to Ernst & Young, and a few years later you were invited to work in its Moscow office. Did you have any connection with Russia before that?
Absolutely none. I knew nothing about your country or about Moscow. That was in 2006, Russia’s economy was growing rapidly. Staff were needed for the Moscow offices, and the management insisted. A familiarization trip was arranged for me, and I simply fell in love with this country. Here I immediately got to know two Russian colleagues who are still my best friends. Then, they performed wonders of hospitality: they took me to Karelia, where we rode snowmobiles. We visited Sochi, with its sea and mountain skiing, When I returned, I agreed at once to the posting. Only five weeks after the first discussion of the possible transfer, I was settling down in Moscow. Initially, of course, it was difficult. I could not even make out what was written on the road signs. But I was surrounded by splendid people who did what they could to help me. And eventually I got the hang of it. This place does have its disadvantages. Traffic jams, the cost of living. But it is a huge city, life goes on round the clock. And within two hours of travel, you find beauties of Nature you can’t take your eyes off.
Is life in Moscow really more expensive than in Amsterdam?
Some things are about twice as expensive. Property, for example. Or eating in restaurants. Otherwise, if you think in euros, it is not all that expensive here. But you gradually get used to calculating everything in roubles. And then prices really seem to have gone through the roof. But anyway, the cost of living is a problem in any major city.
Does your business serve Russian companies entering the European market? Or is it the other way round, foreigners opening businesses in Russia?
Now about 75 percent of our clients are foreign companies. When I first came here, it was quite the opposite. We only served Russian firms entering the international market. But in the crisis of 2008, our clients set about winding up their foreign projects. There was a time when we had simply nothing to do. And then I began seeking out foreign clients interested in the Russian market. There proved to be quite a few of them. And as a result, I did what I had often dreamed of: I opened my own consultancy firm.
How did you decide to compete with the giants of the industry?
The pie is big enough. The point is that the big consultancy companies usually find a problem in a client’s business and propose a solution. That is, they study the situation and write a report. But very often, the way these recommendations are carried out also needs monitoring and supervision. At every stage, you have to see what works, and what is the reason for what doesn’t work. You have to keep your finger on the pulse. The big consultancy firms are less often asked to do so, also because of pricing. Therefore, when a Russian based company also requires hands on assistance, irrespective if they are a subsidiary of a European stock listed aircraft manufacturer, US listed IT company or a Dutch based transportation company, we are perfect alternative. We cooperate with our clients constantly, we are linked both by a business relationship and in most cases by friendly personal relations.
How difficult is it to set up your own company in Russia?
It is not difficult at all. Registering took about a month. True, I set up the Moscow firm not as a Russian one, but as a branch of a Dutch company.
Is that some sort of tax loophole?
Not in the least, it just seemed to me more convenient that way. From the tax point of view, there is no particular difference between a Russian firm and the branch of a foreign one. The accounting requirements for branches are slightly more relaxed and If it is expected that often cash would flow out of and into Russia across the frontier, it is more convenient to register a branch. But if it is a matter of export-import, or of an activity for which a license is required in Russia, then there is no way you can do without a Russian legal entity.
But all the same, creating a company is not just registration. You have to rent an office, hire people and find clients, after all.
I admit I did have clients with whom I had cooperated in the past. And at first I was working on my own, so I took a little eight-square-metre room in an office like centre, where they provided everything necessary for loners like me. They even provided secretaries to answer phone calls all day, and negotiating rooms. It was obviously inconvenient to receive clients in that tiny room. What saved me was that usually, company managers do not like travelling to negotiations through traffic jams, they said “Come to us”. And I was glad to go to them. After about a year, I moved into another office. The firm was growing, I had to hire staff. That business centre was OK while I was on my own, but the price of a square meter of office space was double the market average because of the extra service. So when friends helped me to find new premises, I was glad to change location.
So renting office premises was such a problem that it needed the help of friends?
It wasn’t exactly difficult, but for some reason it took a lot of time and effort in Moscow. That was some years ago. Now there is plenty of office space available, and prices are falling too. But at that time… It seemed I was fated to come up against bottlenecks… Once I’d made it, they didn’t exist any more.
You mentioned selecting staff. How do you find that here? How much do professionals in your field cost, and how well qualified are they?
I usually sought out people through acquaintances. I wanted the key staff members to be people I could trust. Once or twice I took on middle-level personnel through employment agencies, All our people are quite well qualified, we couldn’t allow it to be otherwise. But here is one thing I’ve noticed: middle-level personnel in Russia cost the employer much less than in Europe. But top-lever managers, the real professionals, cannot be had cheaply here. You have to pay them more than you would in Holland.
Let’s talk about the taxes themselves. Take a young man selling soda pop on Tverskaya Street in Moscow. And take the same sort of young man in the red light district of Amsterdam. Who will pay the most in taxes?
I don’t think either of them will pay any taxes at all. But to be serious, the tax burden on small companies in Russia is considerably less than in any of the European countries. There, the rate is from 30 to 50 percent, but here, it is from six percent. For larger companies, the situation levels out somewhat. Corporation tax here is 20 percent (being that the effective tax rate is often a few percent higher because of not being able to deduct all expenses) here and 25-30 percent there. Other payments are about the same. On the whole, large companies in Europe have to pay a little more to the state than in Russia.
What is the difference between the tax laws in Russia and in Europe?
The concepts are quite similar, however, the Russian system has its particularities which may make a big difference. In Russia, many different returns have to be delivered to different addresses, such as the pension fund, social security and so on. In Europe the amount payable come to about the same, but you file less returns and to one or two addresses only. In the Netherlands, when an employee goes on paid holiday, he simply receives it usual salary. But here, you have to account for working days at one rate and days off at a different one. The result often comes out to be more or less same, but it takes a lot more effort to get there in Russia. Or take the cup you’re drinking coffee from. I have to put quite some efforts to prove that it is a necessary business expense and have the proper documentary support in order to be able to deduct it from the tax base. In the Netherlands, this would not create a problem. Everything bought for the office is more or less automatically included in the firm’s expenses and the documentary supporting documents required are much less. You, generally, have to prove justification for expenses only if you have bought, for example, a Ferrari. Here you have to prove and documentary support the need for almost every business purchase, whether it is office equipment or petrol for a service car.
So those preparing to run a business in Russia should be prepared to deal with tax events every day.
Actually, it’s not as hard as all that. You have to realize that unlike in European countries, tax law is very formalistic here. In the West, it is generally sufficient to send documents to the tax office by email. But in Russia they have to be stamped with a seal and sent on paper, being though that it is planned to change this as well. However, if you go into all these formalities and strictly fulfill all the requirements point by point, generally no problems should arise. All those terrible stories about Russian tax officials, who take bribes, or “make business a nightmare”, as they say here, are highly exaggerated or originate from (deliberate) failure to fulfil the requirements. Yes, if documents are filled in incorrectly, you will be fined. There is no beating about the bush here in that respect. But if there are no breaches, you should be fine.
What are the most common problems your clients bring to you?
Well, for example, the Russian tax rules and reporting requirements are as mentioned on some items quite different from let’s say the European or US rules. Often even that much that the global transfer pricing policy or reporting software globally used may not be applied in Russia. Often clients ask us if we cannot aline the Russian compliance. This is our specialization and generally possible if the client is ready to make some changes. Also, the Russian law does not refund VAT to non-Russian tax payers unlike in most other countries. If you are not aware of this fact and you don’t adept your business model accordingly you may face a substantial tax inefficiency. The issue of not being able to recover Russian VAT is most visible in structure where a Russian company acting as an agent for a foreign company and importing goods.
How good are the chances of quickly understanding the nuances of local tax rules?
It took me four years. So at the start, it is certainly better to go to a good consultant.
About Ernstjan Rutten
His education was in law. He worked in the Netherlands in the international companies Arthur Andersen and Ernst & Young. From 2006, he worked in the Russian office of Ernst & Young. In 2008, he founded his own consultancy company Taxperience in Moscow. It specialises in keeping taxes in control. Taxperience has offices in various countries and is a member of an international network.
For Capital Ideas courtesy of BIGMOSCOW
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