On New Tax Privileges to Motivate Innovation Activities of Small and Mid-Sized Enterprises

Apart from such substantial tax privileges to small and mid-sized innovation enterprises as are secured by Federal Law No. 209-FZ of July 24, 2007 on Development of Small and Mid-Sized Enterprises in the Russian Federation, the authors propose to add two types of privileges as regards enterprises' profit tax and value-added tax. The above privileges include¹:

• Exemption of small and mid-sized enterprises (SME) from value-added tax on goods (work and services) based on inventions, useful models, industrial samples, breeding achievements, microchip topology and industrial secrets (know-how) used in their own production which are realized by SME within the effective period of the exclusive rights to the above outputs of intellectual activities, but no more than five years;
• Exemption of SME from profit tax in the form of amounts of income from realization (of goods, work and services) received from inventions, useful models, industrial samples, breeding achievements, microchip topology and industrial secrets (know-how) used in their own production from the start date of their utilization within the effective period of the exclusive rights to the above outputs of intellectual activities, but no more than five years.

If approved, the above privileges will undoubtedly have a positive effect on innovation activities of SME. The thing is to what extent the above privileges may influence the situation as the authors believe that a gap of Rb 121.5m in tax revenues to the consolidated budget of the Russian Federation will be compensated as soon as in a year by growth in the revenue side of the federal budget in the form of additional tax payments in the amount of about Rb 730.0m. Such an evaluation seems to be highly overestimated for a few reasons.
Firstly, it is worth mentioning that at early stages of development most small innovation companies do not simply need privileges, for example, those related to the profit tax because they do not receive profit as at those stages of development they do not produce any products. There are plenty of such companies and it is to be clearly understood that the above amendments have nothing to do with them. Such small companies may receive grants and subsidies by means of a variety of the existing mechanisms: the Bortnik Fund, the Russian Venture Company (RVC), the Skolkovo Fund and other. In this particular case, it is to be specified that economic and social prospects of such developments are to be substantial. However, even with a large number of sources of venture investments in Russia being available small companies which are at their early stages of development receive subsidies and grants rather rarely and the data of the Russian Venture Capital Association (RVCA) points to that fact: in 2010 such companies accounted for the mere 6% of all the venture and direct investments or $153.3m, with the total number of investments amounting to 81² .

And, secondly, it is worth paying attention to the fact that small and mid-sized innovation companies, particularly, in the sphere of innovation technologies often bear an immense burden related to payment of various taxes in the sphere of mandatory social insurance. In 2012, in production and social spheres small companies pay at the rate of 20% which is much lower than that of mid-sized and large companies, however, it is still a rather high burden. So, replacement in that particular case of the profit tax by privileges as regards mandatory social insurance is able to yield greater outputs, the more so because according to the data of the OECD in the sphere of tax privileges granted for R&D in 2008 in Russia tax subsidies were at the lowest possible level as compared to the OECD states (Fig. 1).

Source: OECD Science, Technology and Industry Scoreboard 2009.
Fig. 1. Tax subsidies per $1 of expenses on R&D (large and small companies) in 2008

However, if not an indirect support of innovation activities (through tax privileges), but a direct one - that is, allocation of subsidies from state sources for R&D - is considered the volumes of state financing in Russia are unprecedentedly high and in 2009 they amounted to 0.445% of the GDP (Fig. 2).

Source: OECD, Main Science and Technology Indicators Database, June 2011.
Fig. 2. Direct and indirect state financing of R&D as % of the GDP in 2009

In conclusion, it is worth paying attention to the fact that in many countries, for instance, in Brazil, Bulgaria Hungary, Denmark, Ireland, Slovakia and other, along with measures of support of producers the state policy aimed at encouraging of demand in innovation products and services is actively carried out; such a policy also includes application of measures to motivate demand both in innovation intermediary products and innovation production processes³. However, such a type of policy is mainly popular with regional authorities, rather than with federal ones. In Russia, the policy of motivation of demand in innovations has not been activated even on the regional level so far and such a situation in combination with other factors (a low level of competition, high cost of implementation of innovations and other) often result in inefficiency of support of innovation producers. The same thing may happen with introduction of new tax privileges.

V.А. Kotsyubinsky, Researcher of the Innovation Economy Department
¹ An explanatory note to the draft federal law on Amendment of Individual Statutory Acts of the Russian Federation as Regards Creation of Favorable Tax Conditions for Innovation Activities to Be Carried Out by Small and Mid-Sized Enterprises http://asozd.duma.gov.ru/main.nsf/(ViewDoc)?OpenAgent&work/dz.nsf/ByID&7E192F1CD21EA1A5432579D600286D8D
² Market Review of Direct and Venture Investments in Russia 2010. RVCA. http://www.rvca.ru/upload/files/lib/rvca_yearbook_2011_russian_pe_and_vc_market_review_2010_rus.pdf
³ Regional Innovation Monitor 2010, RIM. http://www.merit.unu.edu/publications/uploads/1308311655.pdf