Innovations and taxes: recent changes in Russian legislation
Anna RUVINSKAYA, Tax Department Manager PricewaterhouseCoopers
The journal "Remedium" No. 6-2008.
Federal Law No. 195-FZ, adopted on July 19, 2007, amends legislation in order to create favorable tax conditions for financing innovation activities. On January 1, 2008, amendments to the second part of the Tax Code of the Russian Federation came into effect, stimulating the development of this sphere.
Usually, innovation activity is understood as the activity of creating and using an intellectual product, bringing new original ideas to their realization in the form of a finished product on the market. Innovation activities, in particular, include the introduction and replication of inventions, know-how, scientific and technical developments, scientific works, discoveries, the creation of prototypes, new samples of equipment, technologies and scientific and technical documentation, etc.
Thus, the amendments made to the legislation are aimed at creating a favorable tax climate for companies that are willing to invest in the development of modern high-tech products and industries, as well as introduce modern technologies created abroad on the Russian market.
What changes have been made to the tax legislation and how can they affect the activities of pharmaceutical companies?
Income taxTwo fundamental changes have been made to the legislation on income tax related to innovation.
Firstly, since January 1, 2008, fixed assets used for carrying out only scientific and technical activities can be amortized using a special increasing coefficient, but no more than 3. The specific value of the coefficient is determined by the taxpayer in the accounting policy for tax purposes.
Prior to 2008, the use of a special depreciation coefficient was possible only with respect to fixed assets used to work in an aggressive environment or increased shift, fixed assets that are the subject of leasing, as well as fixed assets used by agricultural organizations of an industrial type. In addition, taxpayers – residents of industrial-production or tourist-recreational special economic zones had the right to use a special coefficient.
With the introduction of amendments to the Tax Code of the Russian Federation, companies engaged in scientific and technical activities also have the opportunity to use accelerated depreciation in respect of fixed assets. It can be assumed that the benefit is addressed to companies that are engaged not only in scientific research (such as research institutions), but also in the technical implementation of the received developments.
It follows from the wording of the law that a taxpayer may apply an increasing coefficient in respect of fixed assets used exclusively for scientific and technical activities, i.e. those fixed assets that are (equally) used in the process of carrying out both scientific and technical and other activities of the company should be amortized in the general order.
The second amendment made to Chapter 25 of the Tax Code of the Russian Federation increases the standard for calculating R&D expenses that are deductible when determining a company's taxable profit. We are talking about R&D expenses in the form of contributions to specialized funds, which were previously recognized for tax purposes within 0.5% of the taxpayer's gross revenue. Since 2008, the size of the standard has been increased to 1.5% of gross revenue.
Value added taxExemption of R&D from VAT
Prior to 2008, the tax legislation exempted from VAT research and development (R&D), which were carried out at the expense of financing from certain sources (for example, from extra-budgetary funds of ministries, departments, associations, from the Russian Foundation for Basic Research, etc.), or carried out by educational institutions and scientific organizations on the basis of business contracts.
Since 2008, the list of R&D exempt from VAT has been expanded and, in addition to the existing benefits, includes R&D related to the creation of new products and technologies or to the improvement of manufactured products and technologies, if the following activities are included in such work:
- design development of an engineering facility or technical system;
- development of new technologies, i.e. ways to combine physical, chemical, technological and other processes with labor processes into an integrated system that produces new products (goods, works, services);
- creation of experimental, i.e. not having a certificate of conformity, samples of machines, equipment, materials that have fundamental features characteristic of innovations and are not intended for sale to third parties, their testing during the time necessary to obtain data, accumulate experience and reflect them in technical documentation.
Thus, pharmaceutical companies engaged in the development of innovative drugs receive the right not to pay VAT on R&D that meets the above requirements, regardless of the source of funding.
VAT exemption for R&D contracts concluded in 2007 remains in the case when the work under such contracts will actually be completed after January 1, 2008. At the same time, the time of payment for R&D (i.e. before January 1, 2008 or after) will not affect the taxation procedure.
Exemption from VAT of services for the transfer of intellectual property rightsIn accordance with the amendments to Article 149 of the Tax Code of the Russian Federation, the transfer of exclusive rights to inventions, utility models, industrial designs, computer programs, databases, integrated circuit topologies, production secrets (know-how), as well as the transfer of rights to use the specified results of intellectual activity on the basis of a license agreement is exempt from VAT.
It should be noted that not all rights to the results of intellectual activity are exempt from VAT. In particular, the scope of the new legislation did not include trademarks and service marks, the transfer of rights to use which under a license agreement is widespread.
Analyzing the list of rights for which a VAT exemption has been introduced, it can be assumed that the intention of the legislator was to benefit those rights, the use of which should lead to the acquisition and use of innovative technologies, the creation of new, high-tech products. As a result of the introduction of this benefit, over time, we can expect an increase in the number of operations for the transfer of exclusive rights to production secrets (know-how).
Currently, this benefit will be of the greatest practical importance, in particular, for large international pharmaceutical companies in connection with the conclusion of license agreements for the use of computer programs. Such companies enter into license agreements with respect to software used for accounting of operational activities and preparation of unified reports at the group level. It should be borne in mind here that the new legislation provides VAT exemption only with respect to the transfer of rights to a software product, whereas in practice license agreements often provide for the provision of related services by the licensor (for example, technical support services for a software product), which should be subject to VAT in accordance with the rules of the place of sale of these services. Therefore, in order to take advantage of the VAT exemption, it is necessary to determine the cost of the right to use the software product and other elements of the contract separately in the license agreement. In addition, many other questions arise regarding the application of this exemption from VAT. For example, is it possible to apply an exemption when transferring rights to use a software product for which the license agreement was concluded in 2007, but continues to be valid in 2008? At what point in this case is the transfer of the right to use the software product? What happens if the licensor continues to unlawfully collect VAT in 2008 and will the licensee be able to deduct such VAT? Since it is impossible to refuse to use this benefit, in case of payment of VAT to the supplier that is not established by Russian legislation, the tax authorities may challenge the deduction of such VAT from the licensee.
Considering that the legislation does not give a clear answer to many emerging issues, it is necessary to analyze the provisions of tax legislation in relation to a specific license agreement. In many cases, it is the provisions of the license agreement that allow us to draw a conclusion about the legality of the application of VAT exemption.
In conclusion, I would like to note that the amendments made to the Tax Code of the Russian Federation may create favorable conditions for changing the Russian pharmaceutical market in terms of the transition from the market of generic drugs to the market of original drugs. The introduction of amendments to tax legislation will give pharmaceutical companies an incentive to invest in the creation of original drugs and develop the Russian pharmaceutical industry. Those companies that rely on the development of Russian innovative drugs can gain a significant competitive advantage over companies that import expensive foreign-made drugs.
Portal "Eternal youth" www.vechnayamolodost.ru03.02.2009