Corporate Income Tax Preferences as a Tool to Stimulate Innovation

Avdeeva Valentina Mikhailovna Postgraduate Student, Faculty of Taxes, Audit and Business Analysis, Financial University under the Government of the Russian Federation 125167, Russia, Moscow, Leningradsky Prospekt str., 49/2 valentinavdeeva1998@yandex.ru Other publications by this author

IntroductionThe digitalization of the economy is a natural process that follows the industrial Revolution in history.

Researchers believe that it was this stage that had a greater impact on the high rates of economic growth, as well as the universal introduction of innovative technologies. The previous more primitive models and business structures are being replaced by their more advanced versions, characterized by a complex structure. Such models are designed to respond to progress in all spheres of life and rapid changes in the external environment. The state in this situation, of course, turns out to be interested in the development of an innovative economy – and not only as a machine for regulating existing processes, but also as a direct participant in the process that creates new economic benefits and improves existing models.

The state innovation sector largely depends on the tax system, which is responsible for creating conditions for demand for an innovative product and the level of investment in innovative technologies.

Considering the tax policy followed by the Russian Federation in the last few years, it can be noted that it has really moved in an innovative direction – this is evidenced by the fact that the legislation at this stage contains a number of tools that help support innovative projects.

In particular, the tax legislation on the territory of the Russian Federation provides for a number of preferences and benefits to stimulate activities in the field of innovation. It is worth noting that incentive mechanisms are being introduced for taxes, which are significant parts of the revenue side of the budget of the Russian Federation (see Fig. 1) and have the greatest tax burden for organizations. Such taxes include VAT, income tax and regional corporate property tax.

Source: compiled by the author on the basis of statistical tax reporting data

The Federal Tax Service of Russia in the form of 1-NM ^[6]

Figure 1 - Structure of non-oil taxes, fees, and other mandatory payments to federal budget revenues as of January 1, 2022

Semantic essence of tax preferences for corporate income taxIn modern Russia, such forms of tax incentives for innovation activities as tax credits, installments and vacations, tax deduction, as well as a number of preferences and benefits are widespread.

However, preferences for corporate income tax as a tool to stimulate innovation deserve more detailed consideration.

The definition of tax benefits is fixed by the tax legislation of the Russian Federation. According to Article 56 of the Tax Code of the Russian Federation (hereinafter - the Tax Code of the Russian Federation), benefits for taxes and fees are recognized as benefits provided to certain categories of taxpayers and payers of fees provided by the legislation on taxes and fees in comparison with other taxpayers or payers of fees, including the ability not to pay taxes or fees or to pay them in a smaller amount ^[11].

  Tax preferences, on the contrary, do not have a clear definition that would be fixed in the legislation of the Russian Federation, which, in turn, allows specialists to present author's definitions for this term. G.B. Ternopolskaya, N.N. Tyutyuryukov and V.N. Tyutyuryukova define tax preference as a process of providing benefits by the state to certain categories of taxpayers by reducing the amount of the tax liability by lowering the rates, changing the payment terms, introducing lowering coefficients and completely excluding the object of taxation ^[15].

As for the definition given by A.S. Balandina, tax preference is an advantage to certain categories of taxpayers provided by the state, but at the same time emphasizes that these advantages are provided with certain conditions and imply the fulfillment of counter obligations from taxpayers ^[2]. This definition of a tax preference makes it possible to distinguish between it and a tax benefit.

Having considered several definitions of tax preferences, it can be concluded that this is one of the instruments of the state's tax policy, which manifests itself in reducing the taxpayer's tax burden, is mandatory and is aimed at performing socio-economic functions, as well as creating a favorable regime for certain types of economic activity.

However, it is worth noting that despite the fact that tax preferences perform socially and economically significant functions, they are, in a sense, tax expenditures of the budget - the falling revenues of the budgets of the budgetary system of the Russian Federation.

Source: compiled by the author according to statistical data of the Ministry of Finance of Russia ^[12]

Figure 2 - Estimation of the volume of non-oil and gas tax expenditures of the Russian Federation in 2022

The absence of the official status of tax benefits for tax preferences makes it difficult for tax authorities to identify and prevent cases of taxpayers reducing their obligations to the budget for corporate income tax by reducing the tax base without sufficient grounds precisely in the period when the taxpayer uses tax advantages.

            Tax incentives through profit tax preferencesThe profit tax was introduced by the Law of the Russian Federation No. 2116-1 of December 27, 1991 "On the Profit Tax of Enterprises and organizations" and is levied on legal entities.

Since August 2001 Federal Law of the Russian Federation No. 110-FZ of August 6, 2001 supplemented the Tax Code of the Russian Federation with Chapter 25 "Corporate Income Tax", which became effective from January 1, 2002. Thus, since 2001, Chapter 25 of the Tax Code of the Russian Federation has been devoted to corporate income tax, which fixes more than a hundred preferences for corporate income tax.

Analyzing the above-mentioned chapter, we can conclude that it tells about a number of tax preferences that can be temporary or permanent, and also act either on certain categories of taxpayers, or on all at the same time.

For example, it can be noted that since 2007, it has been possible to write off the costs of purchasing equipment as material expenses for those companies whose activities are directly related to innovation, and since 2008, the main form of depreciation at the enterprise can be used with the use of a special coefficient (with the proviso that such a coefficient cannot be greater 3) – this preference is applied if the depreciable asset participates in innovation activities.

The year 2009 in the field of taxation was marked by an increase in the depreciation premium for a number of fixed assets. So, in clause 9 of Article 258 of the Tax Code of the Russian Federation it says that fixed assets of depreciation groups 3-7 can be calculated taking into account the increased premium – if earlier records were kept at a 10% premium, now this figure reaches 30%. The only limitation to keep in mind is that the fixed asset cannot be sold before the company pays the tax. If less than 5 years have passed since the establishment of the increased premium and the start of operation of the fixed asset, the taxable income should be increased to the amount of the premium. Fixed assets that were put into operation later than January 1, 2008 fall under this criterion.

Preferential tax conditions were also received by the organizers of the Sochi Olympic and Paralympic Games in 2014 – according to this bill, from 30.07.2010 they are completely exempt from paying income tax. Employees of the Skolkovo Center, which is primarily known for its innovative inventions, received similar concessions ^[10].

Many organizations are subject to preferential tax conditions in the form of a tax discount, if the organization meets a number of conditions established by Articles 284, 284.1 and 284.2 of the Tax Code of the Russian Federation. Speaking about this in more detail, it is worth mentioning that organizations whose main activities are educational or medical in nature, as well as organizations engaged in tourism, recreation and activities for the introduction of technology in specialized economic zones are completely exempt from income tax.

         There are also general and limited discounts applied when calculating income tax under Chapter 25 of the Tax Code of the Russian Federation:

         1) a taxpayer may transfer certain categories of expenses to the expenses of the reporting period;

     2) specifics of determining the tax base by taxpayers engaged in activities related to the use of facilities of service industries and farms;

         3) postponement of losses for the future;

         4) application of increasing or decreasing coefficients to the depreciation rate (Article 259.3 of the Tax Code of the Russian Federation).

         The above-mentioned measures applied by the state in order to reduce the tax burden for taxpayers, for the most part, have a positive impact on the spread of innovation activities due to the fact that they reduce the amount of the final tax burden that an organization faces in the course of its innovation activities. Nevertheless, it is worth raising the question about the level of effectiveness of the measures taken by the state, as well as the possibility of supplementing them with tax innovations.

S.D. Shatalov, who is considered the ideologue of the tax system in Russia, made a famous speech at the Gaidar readings, in which he criticized the principle that for any problem faced by the country's economy, the introduction of tax benefits is proposed as a solution. According to the speaker, tax benefits should not be considered a "magic wand" that can magically solve the big and serious problems that the Russian economy is facing. He was also forced to note that the principle of using tax benefits and preferences as a panacea is gaining more and more popularity every year, and this definitely does not benefit the economy.

This statement was made by Shatalov back in the 90s of the last century, but it seems that it has not lost its relevance even today ^[5]. The absence of a mechanism to stimulate the innovation activity of economic entities leaves the issue of the application of tax preferences as a tool to stimulate innovation unresolved.

Problems of applying tax preferencesIn addition to the above, as problems related to the preference for income tax, we can note the absence of a single conceptual tool in the field of tax incentives in the theory of taxation, as well as insufficient development of the issue of the role of innovative enterprises as objects of tax regulation in the country.

Another significant problem is the fact that in Russia there is no implementation of a targeted system of measures for tax incentives for innovation activities, taking into account state control over the effective use of profit tax preferences provided to the organization.

To eliminate the above problems, a number of possible solutions are proposed:

1. To fix the term "tax preference" at the legislative level, defining its legal and functional purpose for tax authorities and taxpayers.

2. At the legislative level, determine the tools for tax incentives for innovation.

3. Design a well-coordinated mechanism that allows you to control problems that arise during operations that appear after the application of profit tax preferences outside the tax zone.

Preferential taxation in the field of innovation should primarily pursue increased efficiency of the production process at its various stages, as well as during capital investments in innovative projects of various scales. The state needs to structure taxation in this area in such a way that taxpayers are motivated to start and continue innovative activities without being pushed back by the tax burden. Until this task is solved, it is difficult to judge the successful creation of the financial base of the innovative economy on the territory of the Russian Federation.

Summing up the above, we can conclude that the sphere of tax preferences and benefits in Russia at the moment contains both strengths and weaknesses. In order to increase the effectiveness of stimulating innovative enterprises with the help of profit tax preferences, it is necessary to pay attention to these weaknesses, which are often the cause of tax disputes. This article points to possible ways of solving these problematic issues, which in the future can improve the state of the tax system of the Russian Federation.