Deduction for consideration

The government’s proposed mechanism for tax deduction for participants in agreements on the protection and promotion of investments (SZPK) has raised questions from some lawyers. They suggest that this exemption, due to the requirement for separate tax accounting, could become burdensome for companies for which the incentive to conclude an SZPK is not at all cost reimbursement, but a stabilization clause that guarantees the invariability of legislation. As a result, in their opinion, the attractiveness of SZPK may decrease. Other experts do not share such fears, pointing out that the provision on separate accounting is already in the law on SZPK and it only requires clarification.

The bill submitted by the government to the State Duma on the introduction of a tax deduction mechanism within the SZPK caused a mixed reaction from experts. Recall that companies that have entered into such agreements can count on reimbursement of their investment project costs. Now for this there is a mechanism for subsidizing such expenses, according to which the size of the subsidy is limited to the amount of taxes paid. The proposed option is that the tax deduction is viewed by the government as a more convenient alternative to subsidies.

According to the project, as a result of the application of the deduction, taxes arising from the implementation of the investment project can be reduced to zero. We are talking about income and property taxes, transport and land taxes. However, in order to receive a deduction, companies must keep separate tax records – this is the norm that causes the greatest concern among experts.

Emil Baburov, head of the tax and law department at Deloitte in the CIS, explained to Kommersant that this provision implies restrictions on the accounting of losses from a project covered by SZPK as part of the company’s overall tax base. Not all investment projects involve significant infrastructure costs, offset by investment deduction, and for some investors, the key driver for concluding an SZPK is the stability of legislation. “If the law is adopted in such a wording, enterprises interested in concluding an SZPK only for the sake of stabilization and not claiming a deduction will face a choice – to conclude an agreement and overpay income tax in the first few years of the project (due to the restriction on accounting for losses from the project in the common tax base) or still not to conclude an agreement and not burden oneself with obligations for separate accounting and additional burden on income tax, “he explains.

Natalya Nikitina, head of the tax and legal consulting department of KPMG in Russia and the CIS, notes that although the deduction can give a significant reduction in the tax burden, the project proposes to limit the transfer of incurred losses solely to the perimeter of the tax base for NWPC. “Since in the first periods investment projects are usually unprofitable and in the future these losses are sequentially utilized, a situation may arise when the investor will not actually be able to use the tax deduction tool for SZPK in terms of income tax,” the expert points out.

Lawyers also had questions about the project in connection with the unregulated procedure for combining the tax deduction mechanism with other tax benefits. However, Kirill Nikitin, director of the Center for Tax Policy of Moscow State University, believes that in the Russian Federation there is already “brute force” with preferential regimes and no one has promised “sandwiches from SZPK, TORs, SPIKs and SARs.” The expert also questioned the motivation of companies entering the NWPC for the sake of a stabilization clause: “I think everyone will be interested in the possibility of getting a deduction.”

Vladimir Sokolov, Head of PPP, Infrastructure Projects, Energy and Natural Resources Practice at PwC in Russia, explains that the need for separate accounting was already established when the law on SZPK was adopted in 2020. “In the law, such projects can be implemented by two types of companies: project companies (at least 90% of their proceeds must be received from the implementation of an investment project) and other companies that implement not only this project, but also conduct other activities (for example, a company that owns an operating port is building an additional terminal within the NWPC). Only the latter should keep separate records, regardless of the plans to apply the deduction, ”the expert explains. According to him, some uncertainty in the use of the deduction procedure is now more likely due to the lack of norms on the possibility of using a tax deduction in the law on SZPK, which, in particular, should establish an alternative principle of cost recovery (subsidies and / or deduction).

Diana Galieva, Tatiana Grishina