The authorities offered tax incentives for engineering, similar to IT

The Ministry of Industry and Trade proposed to give benefits to the engineering industry on income tax and insurance premiums, similar to those in force in the IT sector, RBC learned. They can also be compensated for loan costs and issued guarantees against the proceeds.

The Ministry of Industry and Trade has developed a draft concept for the development of engineering and industrial design in Russia and sent proposals to the government. The document, signed by First Deputy Minister of Industry and Trade Vasily Osmakov, is at the disposal of RBC, its authenticity was confirmed by two sources familiar with the contents.

The program should ensure “accelerated technological development and a high level of localization of industrial production,” and will also allow “to eliminate and minimize the risks of further development of barriers limiting the development of the industry,” Osmakov points out.

The draft program included both measures for the regulatory and legal development of the industry (consolidating the very concept of “engineering activities”, creating a register of specialized organizations), as well as tax incentives (including temporary zeroing of income tax, exemption of a number of services from VAT) and financial preferences. The order to support engineering was given by President Vladimir Putin after a meeting with the Business Russia business association.

The government office forwarded RBC's request to the Ministry of Industry and Trade. “The concept (its “road map”) is now in the formative stage. A proposal for such an approach to the development of engineering was sent to the government of the Russian Federation, but not the concept itself,” the press service of the Ministry of Industry and Trade clarified to RBC. RBC sent a request to the Ministry of Finance.

Conditions for receiving support

Engineering, a tool that allows for the accelerated implementation of innovations in industrial production, lies at the intersection of science and industry, says Alan Elbakiev, director of strategy at the Center for Project Management in Industry (part of the Ministry of Industry and Trade). The “road map” for the development of engineering and industrial design has been implemented since 2013, and now the government has returned to the idea of actively developing the industry with an emphasis on solving pressing needs - this includes increasing the availability of credit funds, reducing the tax burden, and meeting the personnel needs of market participants, notes expert.

“The concept was developed by the Ministry of Industry and Trade on behalf of the President together with the expert community and Business Russia; The industrial project management center acted as the project office. In September, the concept was submitted to the government for approval. We hope that it will form the basis of the “road map” for the development of engineering 3.0,” the expert said.

In order to benefit from the benefits offered by the Ministry of Industry and Trade, the company will have to be included in a special register of engineering organizations and industrial design firms, the document says. This will become possible if a number of conditions are met:

• presence of a profile OKVED (activities related to engineering design, development of heat, water, gas supply projects, development of industrial processes and production projects, activities of the customer-developer, general contractor, specialized activities in the field of design);
• tax residence in Russia;
• the share of income from activities in the field of engineering or industrial design is more than 30%;
• experience in successfully providing services (according to the relevant OKVED), annual revenue of more than 10 million rubles. for the three previous years;
• the period of operation of the organization is at least three years;
• the average salary of full-time employees is not lower than the average for the country or region;
• consent to disclose tax secrets.

Every two years, companies will have to confirm their right to be on the register. The Ministry of Industry and Trade hopes that such a list will, among other things, make it possible to carry out the task of monitoring and statistical observation of changes in the market for engineering services (the rules for using the register may provide for the mandatory completion of statistical observation forms).

Tax benefits

The main problems of engineering in the draft concept include “high tax burden.” In this regard, the Ministry of Industry and Trade proposes to consider several mechanisms for providing benefits for Russian engineering companies and organizations in the industrial design sector, namely:

Reduced income tax rate.

It is proposed to reduce it to the level established for organizations in the field of IT technologies, it follows from the document. From January 1, 2022 to December 31, 2024, the income tax rate for IT companies is zero (instead of 20%), it can be applied by organizations accredited by the Ministry of Digital Development, whose core revenue is at least 70% of total income. Then the rate should increase to 3%.

The projected benefit will be available to all organizations from the register of engineering companies that pay income tax, as stated in the document.

Reduced insurance premium rates.

Similar to the income tax, the Ministry of Industry and Trade proposes to reduce the tariff of insurance premiums for engineering companies to the preferential level of IT firms (7.6 instead of 30%). The measure will apply to organizations included in the register, including industrial design companies that apply a simplified taxation system, the draft concept says.

Exemption from VAT.

It is proposed to include industrial design services in the list of operations not subject to taxation (exempt from VAT), the draft concept states. Transactions exempt from VAT are listed in Art. 149 of the Tax Code and include, among other things, the sale of certain medical goods, catering services, transportation of passengers by public transport, and the implementation of tours in the field of domestic or inbound tourism. Exemption from VAT is not equal to the zero rate of this tax (it allows you to claim a refund of the so-called input VAT).

Tax benefits are the most significant support measure offered today, says Natalya Kirillova, a member of the General Council of Business Russia. In her opinion, they will not be burdensome for the budget. “The engineering industry in Russia, unfortunately, is still so small that there will not be any serious loss of income due to the introduction of benefits,” Kirillova assures. The Federal Tax Service does not disclose data on tax collections for specific OKVED.

In order to estimate the lost revenue from the introduction of tax benefits, it is necessary to legislate the very concept of “engineering services,” Elbakiev pointed out. The corresponding draft federal law has already been submitted to the government and is expected to be submitted to the State Duma in the near future, he specified. “After these changes are approved - we expect early 2024 - the Ministry of Industry and Trade will launch an all-Russian register of organizations in the field of engineering and industrial design on the GISP website (State Information System of Industry - RBC). Then the Ministry of Finance will be able to consider changes to the Tax Code regarding the introduction of benefits,” the expert explained.

Financial preferences

The concept names difficulties in obtaining credit financing as one of the barriers to the development of engineering companies. To eliminate them, the Ministry of Industry and Trade considers the following measures necessary:

Lending secured by future earnings.

It is advisable to develop a mechanism that allows engineering organizations to obtain financing (including bank guarantees) from credit institutions on the security of the right to claim proceeds under an agreement with the customer (that is, the funds that the company will receive in the future for a completed contract).

“Engineering companies do not have collateral that banks can understand. Typically, banks come to a manufacturing plant and take machines, buildings, etc. as collateral. What to take from engineering companies? Computers? — Kirillova argues. In her opinion, the proposed mechanism will solve this problem, especially since engineering companies usually have large clients.

Compensation of loan costs.

It is proposed to develop a mechanism for compensating the costs of paying interest on loans for the implementation of import-substituting projects in the field of engineering and industrial design, the draft concept says. Using a loan, organizations will be able to bear investment costs, for example, for the acquisition of fixed assets and their technical re-equipment, automation, and intangible assets. The amount of the subsidy will be no more than 90% of the cost of paying interest/commissions/guarantee cost, but not more than 150 million rubles. per year, as stated in the document.

Design Cost Reimbursement

A fundamentally new measure declared in the concept is subsidizing the costs of industrial design. Within its framework, it is proposed to provide support to manufacturers and developers of industrial products “that have high market potential and (or) critical from the point of view of import substitution,” the draft concept says.

The mechanism will look like this: ANO “Agency for Technological Development” (operator) will conduct a competitive selection for the right to receive a grant among design studios. Based on the results of the selection, a tripartite agreement will be concluded between the product developer, the winner of the competitive selection and the operator, with the subsequent provision of a grant to compensate for the costs of industrial design up to 50% of their cost (and up to 80% if the customer is a defense industry enterprise).

At the same time, it is proposed to oblige the developer to ensure mass production of products worth at least 5 rubles. for every 1 rub. grant for two years from the date of industrial design of the product.

Security issue

The development of engineering is a cross-industry topic, because development can often move from one industry to another, and this makes its support extremely important, Kirillova believes. “The engineering development program is not only about economic benefits, but, more importantly today, about technological sovereignty and security. The development of engineering solutions and inventions determines the further existence and development of the country in conditions of restrictions,” she believes.

Before the 2022 sanctions, Russia purchased significant volumes of engineering services from Western companies, including those present on the Russian market. In particular, Russia’s imports of services in the field of architecture, engineering services and services in technical fields increased in 2021 to $5.1 billion compared to $3.2 billion in 2020, according to the most current data from the Bank of Russia. The leaders in providing such services to Russia were EU countries ($2.9 billion), including the Netherlands ($1.1 billion) and Germany ($0.8 billion). China sold $0.5 billion worth of such services to Russia in 2021.

In October 2022, the European Union banned European companies from providing architectural and engineering services to Russian residents. In addition, in May 2023, the United States identified the Russian architectural and engineering sectors as a potential target of sanctions, meaning that the US authorities could impose blocking sanctions against specific companies from these industries.

Source: RBC