The White House agreed to return most of the income tax to investors, but did not decide from where

The reform of investment tax deductions for income tax to stimulate capital investments in the regions is actually divided into two stages. So far, the government has managed to agree on the introduction of uniform country-wide rules for issuing such deductions to businesses from 2024 – the powers of the regions to determine their parameters have been significantly reduced, follows from the bill submitted to the State Duma. The issue of compensating the regions for income that is lost due to deductions remains unresolved. The proposal of the economic bloc to reimburse such expenses through budget loans was criticized in the Ministry of Finance because of the risks of the regions’ debt load – the share of budget loans in the volume of their debt is steadily growing.

The White House submitted to the State Duma a bill on unifying the rules for businesses to receive investment tax deductions for the regional part of income tax. The document is part of the reform of the inefficient system of providing tax incentives in exchange for investment in the regions. Now companies can reduce the amount of income tax paid to the regional budget by up to 90% of the volume of investments, but conditions vary by region. Benefits were supposed to stimulate the modernization of production, but a significant part of the regions did not apply them because of their unwillingness to reduce tax revenues. From 2021, the government will compensate the constituent entities of the Russian Federation for up to two-thirds of budget losses, subject to the implementation of a regional investment standard, but this did not lead to significant results: in 2022, 19 regions received subsidies, the amount of INV amounted to 27 billion rubles. (See “Kommersant” dated April 24), which does not look comparable to the need for trillions in investments.

The first part of the INV reform is the unification of the rules for granting the deduction itself. The draft law submitted to the State Duma introduces into the Tax Code a separate basis for granting an INV – the company’s expenses for capital investments in investment projects that correspond to the taxonomy of technological sovereignty and are included in the unified register of the Treasury. For projects, investment agreements with the regions on mutual obligations must be concluded. Investors will be able to reimburse up to 25% of the costs of creating, acquiring, upgrading fixed assets. The term for applying the INV is no more than five years from the date of conclusion of the investment agreement, and the tax rate for determining the maximum amount of the INV is no more than 10% (now it varies within the regional part of the income tax – from 0 to 17%).

The deduction is not available to participants in investment protection and incentive agreements (that is, recipients of benefits through another channel), and using the benefit, companies will not be able to use the INV for other reasons. The powers of the regions in relation to the INV have been significantly reduced: they cannot determine the maximum amount of expenses, categories of fixed assets, or establish a ban on the transfer of the INV to the next tax periods.

The second part of the reform – changing the mechanism for compensating for shortfalls in revenues of the regions due to INV – has so far come up against disagreements between departments. The Ministry of Economy proposed to abandon direct subsidies in favor of long-term stimulating budget loans. One of the designs assumed that the regions would receive loans at 3%, but before the investment project reaches budget neutrality (three to four years), the federal budget compensates the rate, turning the loan into an interest-free one, and after the launch of the project, the region will pay off the debt through tax revenues. The proposals were criticized in the Ministry of Finance, noting the risks of debt load in the regions. “I’m just afraid that we, by providing infrastructure loans in trillions of dollars, will soon reach the point where the regions will have a border debt limit and they won’t be able to borrow for their usual budget spending,” commented Anton Siluanov, head of the Ministry of Finance, on the proposal to use budget loans within the INV.

According to the Ministry of Finance, the debt of the regions increased by 12.6% (314 billion rubles) in 2022 and by another 8% (226 billion rubles) by June 2023 and exceeded 3 trillion rubles. In 2022, we recall, the center helped the regions pay off debts on bonds and bank loans, at the same time, the process of replacing commercial debt with budgetary debt is spurring the launch of numerous regional lending programs – infrastructure loans, special treasury loans, and so on. If at the beginning of 2022 budget loans amounted to 1.4 trillion rubles. (55% of the total debt), then in January 2023 – almost 2 trillion rubles. (over 70%), and by June – almost 2.3 trillion rubles. (75%).

In the short term, the choice between subsidies and loans for the treasury is unprincipled, but the probability of a return of funds in the long term for a deficit budget may be more attractive. However, Natalia Nikitina, director of the tax and legal consulting department at Kept, explains that in addition to the risks of debt load, budget loans with a hypothetical return of funds may be worse than direct subsidies, since they can reduce the transparency of the distribution of financial resources, especially if it is impossible to subsequently repay loans and subsequently make decisions on issuance of subsidies to the regions.

The departments directly refused to discuss the prospects for replacing subsidies with loans. “The issue of granting budget loans to the regions will be considered as part of the implementation of the President’s decisions announced at the SPIEF,” only the Ministry of Economy said. Vladimir Putin then, we recall, asked to “think” about the interests of business and the balance of regional budgets.

Diana Galieva