Realization of the fiscal and regulatory potential of the corporate income tax

Musaeva Khaibat Magomedtagirovna ORCID: 0000-0002-3071-0842 PhD in Economics Associate Professor of Taxes and Tax Administration Department; Taxes, Audit and Business Analysis Faculty; Financial University under the Government of the Russian Federation 49 Leningradsky Prospekt str., Moscow, 125468, Russia zavazatm17@gmail.com Other publications by this author

Imanshapieva Mazika Musabekovna PhD in Economics Imanshapiyeva Mazika Musabekovna, Associate Professor, Department of Finance and Credit, Dagestan State University 43"a" Gadzhieva str., Makhachkala, Republic of Dagestan, 367000, Russia mazika21@ramblr.ru

Introduction

    The modern period in almost all countries of the world is characterized by instability and instability of socio-economic development. The Russian Federation is under special pressure, which is overcoming the most difficult trials caused by modern challenges, aggravated by the large-scale sanctions imposed on it. In the current situation, it is extremely important to maximize the use of internal reserves and the potential for growth of tax revenues of budgets of all levels, while maintaining a balance between the fiscal and regulatory functions of taxes. In the system of taxes paid by business entities, the most important is the corporate income tax, which has high not only fiscal, but also regulatory potential to a lesser extent. In this regard, each element of this tax should be deeply thought out and weighed. 

   The issues of improving the mechanism for calculating corporate income tax and possible ways to strengthen its role in stimulating investment and innovation activity are considered in the works of: Anisimova A. A.^[2], Goncharenko L. I.^[3], Gamukina V. V. ^[4], Korotkov Yu.S.^[9], Kachur O. V. ^[8], Dekanova D.R. ^[5], Zotikova N. Z. ^[6], Malis N.I. ^[13], Mandroshchenko O. D. ^[11], Nazarova N. A. ^[13], Panskova V. G. ^[12], Tikhonova A.V. ^[13], Khorudzheva V. I. ^[5], Shatunova G.A. ^[14] and other researchers.

   It is necessary to strengthen the focus of tax incentives on ensuring the technological and industrial sovereignty of the Russian Federation. The current political and socio –economic situation in the country and in the world, as well as the dynamic changes taking place in the economy of the Russian Federation, require in-depth research on the possibilities of taxes to fully realize the existing potential, especially corporate income tax, which directly affects the final result of the activities of business entities.

The results of the study and their discussion

    Since "profit is one of the components of GDP, for an objective assessment of income tax revenues, it is necessary to take into account macroeconomic indicators" ^[7]. Despite the most difficult challenges that Russia faces in modern conditions (including exogenous factors), its economy as a whole shows positive trends in key macroeconomic indicators. Thus, according to official data from the statistical bodies of the Russian Federation in 2023, GDP growth in relation to 2022 amounted to 3.6%, real wages -7.8%, industrial production index -3.5%. There was also an increase in tax revenues to budgets of different levels of the budget system of the Russian Federation.

   In 2023, the consolidated budget of the Russian Federation received tax revenues administered by the Federal Tax Service of Russia for 36183 billion rubles, which is 8% more than in 2022. At the same time, the share of corporate income tax accounted for 22% of all tax revenues administered by the Federal Tax Service of Russia. Comparative data on the volume of basic tax revenues to the consolidated budget of the Russian Federation for 2022-2023 are shown in Fig. 1.

     As the data in Fig.1 show, in 2023, corporate income tax was received by 25% more in the consolidated budget of the Russian Federation than in 2022. At the same time, "the federal budget received income tax for 1918 billion rubles, which is 14% more than in 2022. The consolidated budgets of the constituent entities of the Russian Federation received corporate income tax by 6004 billion rubles, which is 28% more than in 2022" (Certificate "On receipt of income administered by the Federal Tax Service of Russia in 2023").  In general, the growth rate of corporate income tax revenues to the consolidated budget of the Russian Federation outstripped the overall growth in tax revenues. Thus, with an 8% increase in total tax revenues in 2023 compared to 2022, income tax receipts increased by 25% (Fig.2). 

Fig. 1. Comparative characteristics of the volumes and rates of changes in tax revenues to the consolidated budget of the Russian Federation for 2022-2023.  *Source: (Reference "On the receipt of income administered by the Federal Tax Service of Russia in 2023" [Electronic resource].URL:https://analytical.nalog.gov.ru (accessed 02.05.2024)) 

    The observed increase in the amount of income tax was due to an increase in annual recalculations for additional tax payments based on the results of activities for 2022 in the raw and non-raw sectors of the economy (due to an increase in profits due to exchange differences), as well as an increase in the volume of payments from organizations in the banking sector of the economy. An increase in the cost of borrowing following an increase in the key rate (from 7% to 20%) and a decrease in securities quotations led to a loss for many large banks in 2022, which could not but affect the volume of corporate income tax receipts

Fig. 2. Comparative characteristics of the volume and structure of tax revenues to the consolidated budgets of the subjects of the Russian Federation for 2022-2023.

    Source: *(Certificate "On receipt of income administered by the Federal Tax Service of Russia in 2023" [Electronic resource].URL:https://analytical.nalog.gov.ru (accessed 02.05.2024)) 

    According to the Federal Tax Service of Russia, due to an increase in the average price of Urals crude oil (in September - November 2023) by 14.5%, income tax receipts increased by 3.6%. In 2023, along with the raw materials industries, there was a significant improvement in the results of financial and economic activities in such non-raw materials sectors of the economy as metallurgy, energy, construction and information. In general, the profit growth of profitable organizations in 2023 compared to 2022 amounted to 24.1%. A significant increase in income tax paid by organizations of the metallurgical sector of the economy (by 118 billion rubles) was due to an increase in average actual prices for non-ferrous metallurgy products in January-September 2023 (copper by 8.7%, nickel by 2.8%, molybdenum by 68%).   

    The volume of corporate income tax revenues was negatively affected by a decrease in revenues from organizations in the gas sector of the economy, due to a drop in prices for products sold. Thus, the decrease in the volume of exported natural gas in 2023 amounted to 56.6%, the average export price for natural gas - 51.5%. In addition, the growth of income tax revenues is hindered by low volumes of the tax base being formed, as a result of the difficult financial situation of organizations, the uncompetitiveness of their products, increased costs of production and sale of products, a high degree of deterioration fixed assets. So, in general, in the Russian Federation in 2023. The depreciation rate of fixed assets amounted to 40.9% (in commercial organizations – more than 50%). "The coefficient of renewal of fixed assets is low (less than 4.0), the share of completely worn-out equipment is more than 20%"^[6]. In the current situation, it is strategically important to achieve an increase in corporate income tax revenues not by increasing the fiscal burden, but to promote the creation of the most favorable conditions for the growth of the tax base in the future by strengthening investment and innovation activity in the regions (realizing the potential of the regulatory function of the tax). 

     The fiscal role of corporate income tax in the revenues of the consolidated budgets of the Russian Federation is quite high (more than 30%). By the end of 2023, the share of corporate income tax in the total income of the consolidated budget of the Russian Federation was 22%, in tax revenues of the federal budget – 8%, and in tax revenues of budgets of constituent entities of the Russian Federation - 36% (Fig.1; 2).  Consider the income tax receipts of organizations based on the materials of a separate subject of the Russian Federation, in particular the Republic of Dagestan (RD). In 2023, the consolidated budget of the region received tax revenues of 50,242.3 million rubles, which is 6.1% more than in 2022. (Table.1). However, despite the increase in revenues, budget assignments in the region to mobilize taxes to the consolidated budget were fulfilled only by 94.8% (Analytical note "On the progress of taxes, fees and other mandatory payments administered by the Office of the Federal Tax Service of Russia for the Republic of Dagestan to the budget system of the Russian Federation for 2023"). 

Table 1. Comparative data on the receipt of corporate income tax in the consolidated budget of the Republic of Dagestan for 2022-2023.

*Source: compiled according to the reporting data of the Ministry of Finance of the Republic of Dagestan and the Office of the Federal Tax Service of Russia for the Republic of Dagestan for 2022-2023.

     In order to avoid a significant gap between the planned and actual indicators of tax revenues, it is important to assess the tax opportunities of the region as objectively as possible. According to the data of the tax authorities of the Republic of Dagestan, the non-fulfillment of budget assignments for the mobilization of total tax revenues was due to overestimated budget parameters adopted by the Law of the Republic of Dagestan No. 95 dated 12.12.2022. "On the republican budget of the Republic of Dagestan for 2023 and for the planning period of 2024 and 2025."

    As in the Russian Federation as a whole, according to RD in 2023, compared with 2022, the growth rate of corporate income tax receipts outpaced the overall growth in tax revenues. Thus, in 2023, income tax receipts to the consolidated budget of the region amounted to 7076.0 million rubles, the growth rate compared to 2022 was 118.9%. Nevertheless, despite the increase in revenues, budget assignments for the mobilization of corporate income tax were fulfilled only by 95.6%.  In Dagestan, non-fulfillment of budget assignments for corporate income tax in 2023 was largely due to the expectation of a budget effect from the implementation of infrastructure projects for 560.5million rubles. The budget effect was expected from the implementation of the investment project "Cote d'Azur" within the framework of the infrastructure project - the Chirkey – Makhachkala – Kaspiysk water pipeline. However, in fact, investments within the framework of this infrastructure project have been postponed to 2024 and subsequent years.

    In general, the positive dynamics of revenues to the republican budget for separate divisions registered in the territory of the RD was provided by a significant increase in revenues TO No. 8590 of PJSC Sberbank of Russia, PJSC Federal Hydrogenerating Company Rushydro, JSC Russian Railways. According to the results of the control work in 2023, compared with 2022, the amounts before corporate income tax accruals to the consolidated budget of the Republic of Dagestan increased from 249 million rubles.   up to 265 million rubles (Analytical note "On the progress of taxes, fees and other mandatory payments administered by the Office of the Federal Tax Service of Russia for the Republic of Dagestan to the budget system of the Russian Federation for 2023").

     Despite the overall increase in tax revenues, a negative trend was observed for individual payers in the region. Thus, a decrease in revenues for 2023 compared to 2022 occurred for such "taxpayers as: JSC Derbent Sparkling Wine Factory (89.5 million rubles were received in 2023, which is 12.7% less than revenues in 2022); Dorservice LLC in the amount of 27.7 million rubles, which is 30.9% less revenue in 2022; Kizlyar Brandy Company JSC (revenues amounted to 162.6 million rubles, which is 4.3% less revenue compared to 2022)." The decrease in the tax base was influenced by the excess of the growth rate of expenses over sales income, a decrease in profits from signaling activities due to a decrease in income and a simultaneous increase in expenses. In general, due to the low production and investment potential of the Republic of Dagestan, the share of corporate income tax in the total revenue of its consolidated budget for 2023 amounted to only 14% (Table.1), whereas (as noted above), in general, for all subjects of the Russian Federation, the same indicator is more than 30% (in 2023 - 36%).

   Corporate income tax is one of the most risky taxes. It is no coincidence that significant amounts of payments are systematically accrued according to the results of the control work.  In practice, business entities most often use such methods of illegal optimization as: failure to comply with the standards for allocating costs to expenses that reduce the tax base when calculating income tax, entering false information into tax reporting, non-compliance with the requirements for the application of accelerated depreciation and amortization premium, manipulation of preferences, business fragmentation, etc. ^[10]. As a result, business entities face unfair tax competition, and the state has lost tax benefits. Tax authorities should counteract such violations of tax legislation by strengthening control over the activities of business entities with increased tax risk. However, in order to prevent an unjustified increase in tax administration costs, it is advisable to loosen control over less risky organizations and their operations.

     The regulatory function of corporate income tax has a significant impact on the economy and business environment. It should be noted that in many developed countries of the world (USA, Germany, Sweden, Japan, Hong Kong), the share of corporate income tax in their budget revenues does not exceed 10-15%. At the same time, this tax is more focused on performing a regulatory function. And this is despite the fact that corporate income tax rates in these countries are on average comparable to the Russian Federation. This is achieved, along with direct investments, a wide system of benefits and preferences (despite the reduction) in corporate income tax, the use of its internal potential as a tool to enhance economic activity, primarily to stimulate technological renewal of the production process. The rich global experience successfully demonstrates that investments in R&D are drivers of economic growth. "The latest international business report shows that global net investment in R&D has increased to 36% and is the highest figure in history."^[8]

   In order to prevent the bankruptcy of organizations, in conditions of the strongest negative impact on their activities of internal and exogenous factors, comprehensive measures to tax incentives for investment and innovation activity are important ^[1]. In terms of corporate income tax, the following main instruments for stimulating R&D provided for by Russian legislation can be distinguished: non–linear, including accelerated depreciation; depreciation premium; investment tax deduction; recognition of part of deductions as R&D expenses; special industrial investment contract - SPIC. Thanks to this set of tax instruments, organizations have the opportunity to improve the technical equipment of production to a certain extent.

    In recent years, the investment tax deduction (INV) has been increasingly developed, which, in accordance with Article 286.1 of the Tax Code of the Russian Federation, has been introduced in most regions of the Russian Federation. When applying an investment tax deduction by a business entity, the organization will receive a benefit that, as a rule, is several times larger than if it had used accelerated depreciation.

    The conditions for the use of INV are constantly supplemented by federal and regional legislative acts. So, for example, from the period of 1.01.2023, "clause 7, clause 2 of Article 286.1. of the Tax Code of the Russian Federation is in force, according to which, INV includes no more than 100% of the cost of works (services) for installation, testing, adaptation and modification of computer programs and fixed assets included to the Unified Register of Russian Radio-electronic Products" (Federal Law No. 430-FZ dated 04.11.2022 "On Amendments to Article 286.1 of Part Two of the Tax Code of the Russian Federation"). The development of the INV conditions, limitations, as well as the experience of the regions in its introduction are discussed in detail in previous publications by the authors.  We note only the basic condition for the use of INV: a reduction in the income tax base for the purchase of fixed assets to 90% (in Moscow, St. Petersburg, Adygea, Buryatia, in the Republic of Dagestan, etc.); a decrease to 50% (in the republics of Bashkortostan, Ingushetia, Karelia, Crimea, Mari El, etc.).

    There are no requirements in the legislation for further attracting investments, which reduces the incentives to use the saved funds from the investment tax deduction for the subsequent renewal of the fixed asset fleet. The investment tax deduction also leads to a loss of revenues from the budgets of the constituent entities of the Russian Federation, since the federal budget covers only a small part of the revenues of the regions when providing an investment deduction, which also negatively affects the scale of its application.

    The use of the depreciation premium is beneficial only if the payer is not going to sell this property in the near future. Accelerated depreciation can be applied only in cases specifically stipulated in the Tax Code of the Russian Federation. Non-linear depreciation can be used by all business entities, regardless of whether they are engaged in research or not, but it allows you to reduce the tax burden only during the initial period of operation of fixed assets.

Conclusions and suggestions

 1. Corporate income tax, having a high fiscal role, forms a significant part of the revenues of the budget system of the Russian Federation (in 2023 - 22%). Its share in the revenues of the consolidated budgets of the constituent entities of the Russian Federation is even higher (in 2023 - 36%). Despite internal and external (exogenous) shocks, in 2023 as a whole, in comparison with 2022, there was an increase in tax revenues to the budget system of the Russian Federation, while the growth in receipts of the studied corporate income tax significantly outstripped the overall growth in tax revenues. This growth occurred due to both objective and subjective factors analyzed in the work.

2. Despite the increase in revenues, in some regions with low production potential and a low level of investment activity, there was a failure to fulfill budget assignments for the mobilization of corporate income tax to the budget, moreover, its fiscal role is low (for example, in the Republic of Dagestan less than 15% of the total revenues of the consolidated budget of the region). At the same time, there are budget losses on corporate income tax due to untimely investments in planned investment projects. Systemic solutions are needed here, both stimulating the growth of direct investment and measures in the field of tax incentives for investment activity of business entities.

3. Corporate income tax is one of the most risky taxes. At the same time, the reason for the riskiness is both the complexity of the calculation mechanism and the insufficient competence of specialists calculating it, causing accidental violations of the law, and the deliberate actions of responsible persons aimed at using various optimization methods, including vulgar (illegal) methods. As a result, the market motivation of business entities is disrupted, unfair tax competition arises in the field of industry markets, and the state has lost tax benefits. The task of the tax authorities is to counteract such violations by strengthening control over the activities of companies with increased tax risk. However, as part of the development of a risk-based approach to the implementation of forms of tax control, in order to prevent an unjustified increase in tax administration costs, it is advisable to weaken control over less risky organizations and their operations.

4. At the present stage, it is strategically important to achieve an increase in corporate income tax revenues in the constituent entities of the Russian Federation not by increasing the fiscal burden, but to promote the creation of the most favorable conditions for the growth of the tax base in the future by strengthening investment and innovation activity in the regions. An investment tax deduction for corporate income tax plays an important role in stimulating the economic activity of business entities. In order to increase the interest of the regions in stimulating the full-scale introduction of INV, it is advisable either to fully compensate for budget losses during its introduction or to provide for it at the expense of the federal part of the corporate income tax. In cases of further growth of investment activity of business entities using an investment tax deduction, in cases of ensuring an annual increase in investments, it is advisable to provide additional incentive measures in the legislation in terms of reducing the tax burden on corporate income tax. This measure will provide a stimulating effect on accelerating the renewal and reconstruction of the fleet of worn-out fixed assets.

   The main internal reserves for increasing income tax revenues can be both the growth of the tax base due to the activation of economic activity through the fullest realization of its regulatory potential, and comprehensive solutions aimed at reducing tax risks for the tax under study. Only comprehensive and systemic solutions can help achieve a balance between the fiscal and regulatory functions of corporate income tax.