Tax maneuver in the IT industry

Ivan Kosterin, Chief Accountant of TEAM, studied the essence of the innovation and expert opinions on this matter.

At the end of June, the President of Russia announced tax and fee cuts for information technology companies. This news became the main event for the Russian IT industry: Putin proposed to permanently reduce insurance premiums from 14 to 7.6%, and income tax from 20 to 3%. These changes in the IT sector look attractive. The government admits IT to be the oil of the 21st century.

Tax developments are aimed at increasing the competitiveness of Russian companies, attracting young specialists to the industry, and preventing the "leakage" of the best personnel abroad. The President's proposal is comparable to the conditions in Cyprus: the rate of income tax for IT companies is 2.5%. And in brotherly Belarus, and at all 0%.

All Russian IT companies that have the appropriate accreditation will acquire benefits. To obtain accreditation:

• a company shall have at least seven employees,
• share of turnover from the sale of software and services for its development, implementation and support shall be more than 90%.

Direct costs for IT businesses traditionally are labor costs and computing power. Wages in the IT sector are higher than the average, and accordingly, a decrease in the rate of insurance premiums will reduce the actual burden when paying officially employed personnel. Companies will be able to use the savings to increase the salaries, reduce the final cost of the product and strengthen competitiveness, to develop new business areas and hire highly qualified specialists.

The tax maneuver will attract the attention of companies that are just planning to move to more loyal tax jurisdictions. In addition, the development of small and medium-sized businesses in the sector is expected. However, for companies with an established structure in other tax havens it will be difficult to make a decision to return to Russia.

There is another side to the tax maneuver: to compensate for the budget losses, the Government intends to return the obligation to pay VAT on the sale of exclusive rights to software. This is planned to be done already in 2021. Paid VAT is promised to be returned in the form of subsidies under condition the software is entered in the register of domestic software. One way or another, the measure taken will lead to an increase in the cost of the product, and the effect of innovations will be minimal: VAT is to be paid immediately, while obtaining a benefit or subsidy is a process that requires additional efforts. Not everyone can cope with this.

However, the new tax regime will be attractive to developers which:

• sell software to foreign markets: such operations are not subject to VAT at all
• use the simplified tax system: neither the resumption of VAT payment, nor the reduction in income tax affects them, but a decrease in insurance premiums will reduce costs.

At the moment, a bill on the reduction of income tax and insurance premiums has already been developed by the Ministry of Finance and sent for consideration to the Government of the Russian Federation.

Perhaps this is the beginning of Russia's becoming an offshore zone for the IT business. Further development will require more significant changes, which will affect not only taxation mechanisms, but literally all other spheres of life: from the educational system to the judicial system.

Text prepared by Ivan Kosterin, Chief Accountant of TEAM.

Sources: МБХ медиа, Forbes, Klerk.ru, Газета.ру, The Bell, Фонтанка, РБК