On the Formation, by Taxpayers, of Reserves Against Future Research and Development Expenses
By Federal Law of 7 June 2011, No 132-FZ1, Part II of the RF Tax Code (TC) is augmented by new Article 267.2 "Expenditures on Formation of Reserves Against Future Expenses on Scientific Research and (or) Development". The corresponding provisions of tax legislation will enter into force from 1 January 2012.
In accordance with the aforesaid article of the RF TC, the payers of the tax on profit of organizations may create, in their tax records, special reserves against their future expenses on scientific research and (or) development in amounts of no more than 3 % of their incomes to be received from product realization during each reporting period (or tax period) (reserve margin). In effect, this means that they may deduct the sum of such expenses when calculating their tax base prior to their actual effectuation, as a result of which the tax liabilities of organizations engaged in research and development will become lower.
As the foundation for the creation, in organizations’ tax records, of special reserves against future expenses on scientific research and (or) development will serve the research and development programs specifically elaborated and approved by a given organization. In this connection, the relevant reserves are to be formed for a period of no more than 2 years on the basis of a budget drawn for the implementation of a given program (or programs), which is to incorporate only those expense items that can be recognized as expenses on scientific research and (or) development in accordance with Subitems 1 – 5 of Item 2 of Article 262 of the RF TC in the wording stipulated in Federal Law No 132-FZ2, but in amounts not exceeding the established margin size of reserves.
The expenses on scientific research and (or) development allocated to specific programs by the organizations that have created reserves against future expenses on research and development are to be charged against the sum of the aforesaid reserves (that sum being diminished as a result). In this connection, if the amount of reserves has been found to be insufficient to cover the implementation of one or other of the research and development program approved by a given organization, the residual sum is to be charged, for the purposes of taxation, as expenses on scientific research and (or) development in an ordinary procedure.
If the amount of reserves has not been fully spent within a period of 2 years from the moment of their allocation, the residual is to be restored as part of an organization’s non-operating income for that reporting period (or tax period) during which the corresponding sum was allocated as reserves.
It should be noted that no sanctions for failure to spend in full, within an established period, the sum of reserves against future expenses on scientific research and (or) development are envisaged neither in the final wording of Article 267.2 of the RF TC nor in the provisions stipulated in Federal Law No 132-FZ whereby changes are introduced in Part I of the RF Tax Code. At the same time, Article 267.2 of the RF TC as worded in the draft law while it was being considered3 did envisage some specific sanctions for such failure: the residual reserves were to be included in a taxpayer’s extra-realization incomes and then further increased by the amount of interest charged for the period established for the existence of the reserves at a rate equal to the RF Central Bank’s doubled rate of refinancing established as of the sate of the creation of the reserves.
Absence of any sanctions has, in fact, created for taxpayer organizations, opportunities for being credited by the State, at zero interest rates, for periods of up to two years, in amounts put on records as their reserves. This has become possible, among other things, because it is practically impossible to estimate, on the basis of programs elaborated and approved by a taxpayer (which serve as a sole foundation for creating relevant reserves), whether or not a given organization indeed intends to carry on a scientific research and (or) development project. In a situation when the conditions for reserves being created by a taxpayer have been made extremely simple, the absence of appropriate sanctions is fraught with additional risks of misuse of the granted privilege, thus making doubtful its potential positive effect in terms of creating incentives for innovation activity in the sphere of research and development.
T. A. Malinina – Head of the Department of Tax Policy
1 "On Introducing Alterations in Article 95 of Part One, Part Two of the Tax Code of the Russian Federation in the part of Creating Favorable Tax Conditions for Innovation Activity, and in Article 5 of the Federal Law "On Introducing Alterations in Part Two of the Tax Code of the Russian Federation and Some Legislative Acts of the Russian Federation".
2 These expenditures include: the amounts of depreciation charged against the fixed assets and intangible assets (with the exception of buildings and structures) being used for implementing scientific research and (or) development projects for those periods when those assets were being exclusively for purposes of research and development; the amounts of remuneration to be paid to the participants in research and development projects, as envisaged in Items 1, 3, 16 and 21 of Article 255 of the RF TC, during periods when they were carrying on research and development work; tangible expenses directly linked to the performance of research and development work, as envisaged in Subitems 1 – 3 and 5 of Item 1 of Article 254 of the RF TC; other expenses directly linked to the performance of research and development work, but in amounts of no more than 75 % of expenditures on remuneration listed herein. With regard to those taxpayers that act as clients placing orders for research and development the relevant expenses consist of the cost of work carried out under contracts for conducting scientific research and contracts for conducting development and technological tests.
3 Draft Law No 448864-5.
As the foundation for the creation, in organizations’ tax records, of special reserves against future expenses on scientific research and (or) development will serve the research and development programs specifically elaborated and approved by a given organization. In this connection, the relevant reserves are to be formed for a period of no more than 2 years on the basis of a budget drawn for the implementation of a given program (or programs), which is to incorporate only those expense items that can be recognized as expenses on scientific research and (or) development in accordance with Subitems 1 – 5 of Item 2 of Article 262 of the RF TC in the wording stipulated in Federal Law No 132-FZ2, but in amounts not exceeding the established margin size of reserves.
The expenses on scientific research and (or) development allocated to specific programs by the organizations that have created reserves against future expenses on research and development are to be charged against the sum of the aforesaid reserves (that sum being diminished as a result). In this connection, if the amount of reserves has been found to be insufficient to cover the implementation of one or other of the research and development program approved by a given organization, the residual sum is to be charged, for the purposes of taxation, as expenses on scientific research and (or) development in an ordinary procedure.
If the amount of reserves has not been fully spent within a period of 2 years from the moment of their allocation, the residual is to be restored as part of an organization’s non-operating income for that reporting period (or tax period) during which the corresponding sum was allocated as reserves.
It should be noted that no sanctions for failure to spend in full, within an established period, the sum of reserves against future expenses on scientific research and (or) development are envisaged neither in the final wording of Article 267.2 of the RF TC nor in the provisions stipulated in Federal Law No 132-FZ whereby changes are introduced in Part I of the RF Tax Code. At the same time, Article 267.2 of the RF TC as worded in the draft law while it was being considered3 did envisage some specific sanctions for such failure: the residual reserves were to be included in a taxpayer’s extra-realization incomes and then further increased by the amount of interest charged for the period established for the existence of the reserves at a rate equal to the RF Central Bank’s doubled rate of refinancing established as of the sate of the creation of the reserves.
Absence of any sanctions has, in fact, created for taxpayer organizations, opportunities for being credited by the State, at zero interest rates, for periods of up to two years, in amounts put on records as their reserves. This has become possible, among other things, because it is practically impossible to estimate, on the basis of programs elaborated and approved by a taxpayer (which serve as a sole foundation for creating relevant reserves), whether or not a given organization indeed intends to carry on a scientific research and (or) development project. In a situation when the conditions for reserves being created by a taxpayer have been made extremely simple, the absence of appropriate sanctions is fraught with additional risks of misuse of the granted privilege, thus making doubtful its potential positive effect in terms of creating incentives for innovation activity in the sphere of research and development.
T. A. Malinina – Head of the Department of Tax Policy
1 "On Introducing Alterations in Article 95 of Part One, Part Two of the Tax Code of the Russian Federation in the part of Creating Favorable Tax Conditions for Innovation Activity, and in Article 5 of the Federal Law "On Introducing Alterations in Part Two of the Tax Code of the Russian Federation and Some Legislative Acts of the Russian Federation".
2 These expenditures include: the amounts of depreciation charged against the fixed assets and intangible assets (with the exception of buildings and structures) being used for implementing scientific research and (or) development projects for those periods when those assets were being exclusively for purposes of research and development; the amounts of remuneration to be paid to the participants in research and development projects, as envisaged in Items 1, 3, 16 and 21 of Article 255 of the RF TC, during periods when they were carrying on research and development work; tangible expenses directly linked to the performance of research and development work, as envisaged in Subitems 1 – 3 and 5 of Item 1 of Article 254 of the RF TC; other expenses directly linked to the performance of research and development work, but in amounts of no more than 75 % of expenditures on remuneration listed herein. With regard to those taxpayers that act as clients placing orders for research and development the relevant expenses consist of the cost of work carried out under contracts for conducting scientific research and contracts for conducting development and technological tests.
3 Draft Law No 448864-5.