Russian IT companies push for tax privileges

Russian IT companies push for tax privileges
Russian IT companies push for tax privileges
By Vladimir Kozlov in Moscow October 21, 2020

Companies from various segments of the Russian IT sector are lobbying to be included in a tax privilege scheme referred to as a "tax manoeuvre," which aims to make the sector more competitive.

Although the "tax manoeuvre" was originally intended only for software manufacturers, its scope has been constantly broadened as the Russian government strives to add some momentum to its programme to digitise the Russian economy.

Most recently, companies manufacturing telecom equipment and other IT hardware have been included in the scheme, while social media and search engines have been left out and are lobbying for inclusion.

The digital economy committee at the Federation Council, the upper chamber of the Russian parliament, has proposed decreasing the value added tax for the IT industry from 20% to 3% and the size of mandatory social security payments by employers from 30% to 7.6% as of 2021.

Hardware competition

While Russian software manufacturers are widely considered to be losing competition to their global rival, in the telecom equipment segment, which has less often come to the limelight, the situation is just about the same.

According to estimates by the Association of Russian developers and manufacturers of electronic equipment, known under its Russian acronym ARPE, about 70 local companies make telecom equipment. They are responsible for about 20% of Russia's $4bn a year telecom equipment market, dominated by the likes of Huawei and Nokia.

Local players have long been lobbying for privileges that would make them more competitive. Two years ago, the TELMI group, which includes the firms Т8, Elteks and Mikran, sent a proposal to the Ministry of Industry and Trade stipulating 25% to 30% quotas reserved for local companies in total purchases of telecom equipment. However, the initiative went nowhere.

Import substitution fails

Although, over the last few years, the Russian government has been pushing for "import substitution" – that is replacing imported products with local analogues whenever relevant – Russian telecom equipment manufacturers have been unable to benefit.

"Regulations on import substitution stipulate priority for local manufacturers except for cases where no local analogues are available," said Ivan Pokrovsky, executive director of ARPE, as cited by the Russian daily Kommersant.

He explained that major Russian telecoms that already operate many pieces of imported equipment use the compatibility issue to argue that locally manufactured equipment is not compatible with the currently used components and, therefore, cannot be considered as "analogues."

Meanwhile, experts say that the inclusion of telecom equipment manufacturers in the tax privilege scheme is unlikely to have a major impact on the division of the local market between local companies and their global competitors.

"The extension of the tax manoeuvre to telecom equipment manufacturers won't make them much more competitive in the market," Mikhail Alekseyev, managing partner at AC&M Consulting, was quoted as saying by Kommersant. "I can see that only in some specific areas, such as servers for data centres, routers or wireless modems, Russian companies will be able to increase their market shares."

Online companies want in

Probably inspired by the example of telecom equipment manufacturers, Russian online companies, which don't qualify as software manufacturers, have also called for inclusion in the tax privilege scheme.

The Russian Association of Electronic Communications (RAEC), which includes Mail.ru Group, Google, Avito, Rambler and Ozon, has called on the government to add online companies, including search engines, social media, online stores and video streaming services to the tax manoeuvre program.

Under the original criteria, only companies with 90% of revenue accounted for by software development can be added to the programme, which leaves out the lion's share of local online companies.

RAEC also suggested that software developed in Russia by companies with foreign shareholders should be treated as locally developed software. Under another proposal from the association, VAT on all digital services should be lowered to 10%, and that on mobile apps scrapped altogether.

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