Who Will Get Tax Incentives?
On January 1, 2007 the amendments to the Tax Code of Russia are to come into force, providing tax incentives to IT-companies suiting a number of requirements.
Oct 04, 2006
On January 1, 2007 the amendments to the Tax Code of Russia are to come into force, providing tax incentives to IT-companies suiting a number of requirements: a company should have a governmental accreditation, earn 90 percent of its turnover by developing and selling software, while 70 percent of its revenue should come from software exports, and it should employ more than 50 people.
Still members of the Russian IT-community express different views on the initiatives. Valentin Makarov, the CEO of Russoft, the national association of software vendors, representing 80 Russian IT-companies, voiced his opinion on the tax concessions.
- How will the new law influence the Russian software market?
If many companies obtain the benefits, granted by the law, it will be the first step towards business legalization, so the market can boom within several years becoming more transparent. In case the accreditation system sorts out only big companies, the problem will remain unsolved, and short after the law will be repealed as ineffective, while tax benefits as a means of exports support will be compromised.
- But the conditions of obtaining the governmental accreditation remain unknown...
In my opinion, the final list of accreditation requirements is mentioned in the law, so I don’t think reasons for introducing any additional requirements contradicting the existing ones.
- Why only export-oriented companies can benefit from tax incentives?
Exporters are on the edge of the world competition. If they win at the international level, they’ll get necessary and invaluable qualities to be successful in the Russian market as well. So encouraging IT-companies to go international, the state stimulates IT-business as a whole, increasing the competitiveness of Russia up to the worldwide level.
- Can tax incentives stimulate some Russian companies to transfer their headquarters abroad, so that their Russian software developers become exporters de-jure?
Just to prevent such cases we need accreditation, which should be performed by a self managing organization consisting of market members deeply interested in maintaining the state support of exporters.
- Do you mean such organizations as Russoft?
Yes, I mean Russoft and AP KIT. Initially the Ministry for Information Technologies and Communications (MinInformSvyazi) was speaking about involving directly the leading associations in the accreditation process. In summer 2006 these associations, uniting market members, weren’t asked for advice on the accreditation issues. I hope the situation will be clarified at the meeting of the Ministry’s advisory council.
- One of the requirements for the tax benefits envisages employment of more than 50 people. Isn’t it too strict for the Russian conditions?
Yes, it is and that’s why Russoft offered to decrease the level to 30 employees. There is no need to lower the figure further, because smaller companies can use other schemes, for example, simplified taxation with almost similar tax rates.
- Will it become even more profitable for foreign companies to place orders for software development in Russia when the new law comes into force?
Certainly, it will. Tax incentives are aimed at increasing the competitiveness of Russian companies by reducing indirect costs of software development. So such measures will be applied to both software vendors and developers.
- But do only software companies need the state support?
Of course, to increase the development of innovations and new technologies in Russia tax burden should be lightened for all innovative companies, for example, by widening costs reporting allowances and reducing accounting and auditing expenses. Still here comes another problem which will take much time to solve. We should find the strongest strong point, which is software development in Russia today, and raise it to the international level to prove the effectiveness of the state support and then go ahead.
Sergey Andreev, CEO of ABBYY:
Little is known about the accreditation procedures, but they seem to be conducted by a non-governmental association of software developers. We hope our company won’t face any difficulties in getting the accreditation. Two years ago to improve management quality and business transparency ABBYY separated its two different businesses: software product development for the worldwide markets and sales of our products in Russia. As a result, we don’t need to change company’s structure now.
Viktor Vainshtein, CEO of Aplana:
Our company suits two requirements: the number of employees and the percent of turnover provided by developing and selling software. Still we miss the third one - 70 percent of company’s revenue should come from software exports. So we are thinking over the variants of structure change to get an accreditation in the future.
Still members of the Russian IT-community express different views on the initiatives. Valentin Makarov, the CEO of Russoft, the national association of software vendors, representing 80 Russian IT-companies, voiced his opinion on the tax concessions.
- How will the new law influence the Russian software market?
If many companies obtain the benefits, granted by the law, it will be the first step towards business legalization, so the market can boom within several years becoming more transparent. In case the accreditation system sorts out only big companies, the problem will remain unsolved, and short after the law will be repealed as ineffective, while tax benefits as a means of exports support will be compromised.
- But the conditions of obtaining the governmental accreditation remain unknown...
In my opinion, the final list of accreditation requirements is mentioned in the law, so I don’t think reasons for introducing any additional requirements contradicting the existing ones.
- Why only export-oriented companies can benefit from tax incentives?
Exporters are on the edge of the world competition. If they win at the international level, they’ll get necessary and invaluable qualities to be successful in the Russian market as well. So encouraging IT-companies to go international, the state stimulates IT-business as a whole, increasing the competitiveness of Russia up to the worldwide level.
- Can tax incentives stimulate some Russian companies to transfer their headquarters abroad, so that their Russian software developers become exporters de-jure?
Just to prevent such cases we need accreditation, which should be performed by a self managing organization consisting of market members deeply interested in maintaining the state support of exporters.
- Do you mean such organizations as Russoft?
Yes, I mean Russoft and AP KIT. Initially the Ministry for Information Technologies and Communications (MinInformSvyazi) was speaking about involving directly the leading associations in the accreditation process. In summer 2006 these associations, uniting market members, weren’t asked for advice on the accreditation issues. I hope the situation will be clarified at the meeting of the Ministry’s advisory council.
- One of the requirements for the tax benefits envisages employment of more than 50 people. Isn’t it too strict for the Russian conditions?
Yes, it is and that’s why Russoft offered to decrease the level to 30 employees. There is no need to lower the figure further, because smaller companies can use other schemes, for example, simplified taxation with almost similar tax rates.
- Will it become even more profitable for foreign companies to place orders for software development in Russia when the new law comes into force?
Certainly, it will. Tax incentives are aimed at increasing the competitiveness of Russian companies by reducing indirect costs of software development. So such measures will be applied to both software vendors and developers.
- But do only software companies need the state support?
Of course, to increase the development of innovations and new technologies in Russia tax burden should be lightened for all innovative companies, for example, by widening costs reporting allowances and reducing accounting and auditing expenses. Still here comes another problem which will take much time to solve. We should find the strongest strong point, which is software development in Russia today, and raise it to the international level to prove the effectiveness of the state support and then go ahead.
What the industry thinks
Representatives of Russian cSergey Andreev, CEO of ABBYY:
Little is known about the accreditation procedures, but they seem to be conducted by a non-governmental association of software developers. We hope our company won’t face any difficulties in getting the accreditation. Two years ago to improve management quality and business transparency ABBYY separated its two different businesses: software product development for the worldwide markets and sales of our products in Russia. As a result, we don’t need to change company’s structure now.
Viktor Vainshtein, CEO of Aplana:
Our company suits two requirements: the number of employees and the percent of turnover provided by developing and selling software. Still we miss the third one - 70 percent of company’s revenue should come from software exports. So we are thinking over the variants of structure change to get an accreditation in the future.