On Corporate Income Tax

I read the news that the authorities plan to differentiate CIT rates depending on production complexity, and that reduced rates are proposed for high-value-added processing stages. There are no details of the initiative, nor any methodology for determining production complexity. I do not think this is the best way to stimulate domestic production, for a number of reasons:

Production complexity is very hard to define, and it is not the key marker of development. The key marker is the production of unique products that command a high price because of their uniqueness. The creative economy, for example, makes unique films that are in good demand abroad. Would such an industry get CIT breaks? Or take computer manufacturing (essentially assembly). It looks like a high-value-added product, but in fact it is simply the assembly of parts imported from China, and the value added amounts to the labor of low-skilled assemblers plus the seller's margin. Criteria for measuring the complexity of an economy probably exist, but I think any such assessment will be subjective.

Any degree of subjectivity erodes trust in the decision-maker and will constantly give rise to arbitrage, which increases bureaucracy and dependence on officials. All of this worsens the investment climate and raises the risk of corruption and cronyism. Processes should be transparent and simple.

Administering complex taxes raises the cost of collecting them. Any differentiation of taxes creates a constant incentive for businesses to optimize. Large diversified holdings will start shifting costs to companies with higher rates, which will raise the cost of audits and increase subjectivity in tax inspections. That, in turn, will damage the investment climate and feed corruption and cronyism.

Any arbitrage within a single tax always brings many problems that are very hard to resolve, and selective support for particular enterprises always creates imbalances. The key criterion for production should be its competitiveness. Even simple products, given high productivity and high quality, lead to high value added and growth in output, just as complex production offers no guarantee of competitiveness. Therefore, industrial production should on no account be stimulated by granting separate benefits to separate categories of enterprises. Uniform principles should be introduced for all enterprises. The world has long since figured this out for us, so here is what could be done within the Tax Code to stimulate industrial production:

• Accelerated depreciation for all equipment, as well as for industrial buildings and structures. This allows companies to recover their investment faster and reinvest it in other production.

• VAT exemption on equipment acquired through finance leasing. This would keep companies from tying up funds in VAT and reduce the initial investment, while also encouraging the development of leasing in the country.

• VAT exemption on imports of technological equipment. This provision existed before; it can be modernized, simplified and automated.

• Synchronization of tax and accounting records for companies, to cut the cost of bookkeeping. At present many expenses are not deductible, and some are calculated by different methods, provisions for example.

• An enhanced multiplier on R&D expenses. This would require such organizations to be registered as research entities, to prevent fraud and the understatement of the CIT base.

• A lower MET rate for each successive processing stage, with the rate reduced to zero at the 4th–5th stage.

• Permission to write off expenses on intangible assets in full in the period of their acquisition.

The Tax Code should be simple, free of complex accounting and subjectivity. Rates should be fair and economically justified. Investors care more about the transparency of tax administration than about reduced rates: once profit has been earned, companies always factor CIT into their calculations, whereas nobody ever plans for penalties and additional assessments. What matters to an investor is predictability, not benefits. This is my subjective opinion.