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The tax maneuver for the IT segment will begin on January 1, 2021.

The tax maneuver for the IT segment will begin on January 1, 2021.

8 July 2022

Deputies of the Lower Chamber of the Russian Parliament adopted in the third reading a law providing for a reduction in the tax burden on the domestic IT industry.

As envisioned by the President of the Russian Federation Vladimir Putin, who proposed such measures to support the Russian IT segment about a month ago, Russia will become one of the most attractive countries in the world for doing IT business. However, a number of domestic Internet giants, which receive the bulk of their profits from the sale of advertising or goods on the Internet, do not fall under the new law.

Draft Law No. 990337-7 “On Amendments to Part Two of the Tax Code of the Russian Federation (in terms of measures of tax support for organizations operating in the field of information technologies), which received the unofficial name “On Tax Maneuvers in the IT Industry”, was prepared by the Ministry of Finance of the Russian Federation and submitted to the State Duma of the Russian Federation on July 16. Information about its adoption by deputies in the third reading was posted on the official website of the Parliament.

What results are expected from the introduction of tax breaks

The new legislative act provides, starting from January 1, 2021, for a significant reduction in income tax for the Russian IT industry (from the current 20% to 3%). Companies in this category will also be subject to reduced insurance premium rates (7.6% instead of the previously charged 14% at a reduced rate), and for an indefinite period. Thus, participants in the domestic IT segment will pay 6% to the Pension Fund, 1.5% will go to compulsory social insurance, and 0.1% to compulsory health insurance.

The document states that organizations involved in the design and development of electronic component base products and electronic (radio-electronic) products included in the relevant register of the Ministry of Industry and Trade of the Russian Federation will be able to use similar preferences for insurance premiums and income tax.

As Natalia Kasperskaya, Chairperson of the Board of the Association of Software Developers (ASD) “Domestic Soft”, reported in the media, the experts of the association have analyzed how this measure will affect the business of companies. So, according to the calculations made, for an average company with a turnover of 1 billion rubles and the size of the wage fund (payroll), together with taxes, of 70% of this amount, a reduction in the unified social tax will free up 84 million rubles, and this is an opportunity to additionally hire, for example, about 30 highly skilled developers and raise salaries. The reduction in income tax will allow more funds to be invested in development.

The Minister of Finance of the Russian Federation Anton Siluanov, when commenting on the amendments to the Tax Code, noted that as a result, the cost of digital developments for the end user will decrease, and this is the most important thing. The domestic IT sector itself will become, according to the Minister, not only a driver of the economy, but in the future it will also act as insurance in case of recurrence of unforeseen situations. Such, for example, as the period of the pandemic, which countries almost all over the world had to face. Economic activity will continue to move online, he said.

It is interesting to note, as experts believe, that the tax incentives provided for by the law “On Tax Maneuver in the IT Industry” will bypass the largest Russian Internet companies. So, in order to participate in the “tax maneuver”, an IT company must have the appropriate accreditation with the Ministry of Communications of the Russian Federation, its revenue by 90% or more must come from the sale of software, and the staff must consist of at least 7 people. Many giants of the domestic IT market do not fall into the number of such companies. The lion’s share of their earnings falls not on development, but on the sale of advertising spaces or goods on the Internet, but the proceeds from the sale of software that is aimed at distributing advertising do not fall under tax preferences.

VAT on the sale of software for domestic products was left at zero

The Ministry of Communications of the Russian Federation proposed to compensate for the budget revenues that fall out from the reduction in the tax burden by refunding VAT on the sale of exclusive rights to software and rights to use it under license agreements, starting from 2021. The Ministry calculated that only for the period of the next 2021, the abolition of VAT benefits can bring an additional 42.5 billion rubles to the budget. At the same time, IT companies whose software is included in the register of domestic software can be provided with subsidies - it is assumed that their total amount for 2021 will be 11.4 billion rubles. However, according to experts, the refund of VAT on the sale of software in the amount of 20% will lead to an increase in prices for foreign software by almost 17%. For many developers working for the Russian market, this is unprofitable, and those working on outsourcing and offshore programming will benefit the most.

As a result, the Government recognized that it is impossible to fully refund VAT, and decided to stop at such a measure as maintaining a zero rate for the sale of software, but only the one included in the register of domestic software.

Source: IT News