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Section 14. Economics and management
Section 14. Economics and management
Mirzaev Farkhod Isamovich, Banking and finance academy of the Republic of Uzbekistan, Doctor of economics, Faculty of Training E-mail: aoteuliev@gmail.com Oteuliev Azamat Abilkasimovich, Banking and finance academy, Researcher, Teaching Department
On instruments of tax incentives of the innovative development in the economy of Uzbekistan
Abstract: This scientific article researches peculiarities of using various tax concessions of stimulating innovative activity of the enterprises. It also provides comparative analysis of possible consequences of applying these instruments in practice. This article is also devoted to the analysis of the current government policy of the tax support of the innovative enterprises in Uzbekistan and development of proposals and recommendations on improving the existing mechanism of the state tax stimulation of innovative processes ongoing in the economy based on the principles of the support of innovative processes by three aspects: producers of the innovative production, consumers of these goods and specialists who create innovations.
Keywords: innovations, innovative enterprises, R&D, qualified R&D.
Precisely tax measures are mainly considered as a key mechanism for stimulating the activity of national enterprises in the field of research and development (R&D) and innovation in many industries. In conditions of tough international competition and accelerating the process of globalization of the world economy many countries try to attract to their territory the best laboratories, the best scientists and the most advanced, innovative enterprises by means of improving the tax regime.
Many countries of the world have already developed and are efficiently implementing particular measures of tax privileges to encourage investment of private enterprises, research institutions in different periods of their development. In addition to standard tax measures of a regulatory nature, such as exemption, reduction, differentiation of tax rates in order to stimulate R&D, these countries use other mechanisms, such as deferred payment of taxes; reducing the size of the taxable base; deduction of taxes.
Below we are going to consider the main types of tax concessions given to R&D existing in developed countries of the world.
Write-off of current expenditures on R&D. Many developed countries allow businesses to write off the entire cost of the current expenditures on R&D, in the year in which the expenses were made. Thus in some countries, losses occurred are supposed to be referred to the next or last year or distributed during the period with the indefinite duration.
tax incentives, expenditures on R&D, innovative tax credit,
The opportunity to indemnify their losses due to past or future profits is a substantial support for enterprises using new technologies and innovative projects for high-risk, as their activity at first is often unprofitable. As an example of such kind of measures we can state French experience where it is permitted to refer current expenditure on the performance of companies either to past three years or to next three years [1, 12]. There entrepreneurs usually select the scheme to write off their expenses in advance.
Additional tax credit. The purpose of this measure which is complementary to the first, is a further decline of the tax burden for businesses on those activities that are associated with R&D. Additional tax credit allows businesses to reduce taxable bases in a larger amount than their R&D expenditures. For example, if the company made a profit, it can reduce its taxable income deducting the amount which exceeds its expenditures on R&D. The right for this benefit can be determined by the volume of expenditure on R&D, or their increment compared to the prior level. In some countries there are limits on the maximum amount for either accounted expenditures on R&D or the size of the annual deduction.
In particular, additional tax credits are used in Great Britain, Belgium and Denmark on the basis of volume indicators, and in Australia, Austria and Hungary additional tax credits are used on the combined basis i. e. with the account of volume and incremented indicators.
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So in Great Britain large businesses have an opportunity to exempt from taxation the part of its profit in the amount equal to 130 %, and small businesses — in the amount of 200 % from the volume of R&D expenditures [2, 33].
Tax credit on research (TCR). This tool has become not only the first targeted, but according to many analysts, the main tax benefit in tax subsidies of innovation. It has several objectives — improving the overall level of spending on R&D between separate items of expenditures that is to change the structure of expenditures. Introduced for the first time in the United States in 1981 it was aimed at balancing the absolute scientific and technical excellence of the USA with other countries, especially Japan, which in the 70-s started to increase their spending on R&D to reduce its scientific and technological backwardness. Over the past thirty years an increasing number of countries is applying the TCR in many cases raising its size and improving the mechanism of its application. Thereby it can be considered as one of the bright examples of the tax competition between countries who have passed the stage of innovation development of economy.
TCR allows companies to deduct from the amount of the income tax a part of expenses on the innovations determined by the interest rate of the tax credit. There are various ways to implement this deduction in different countries, but the main differences are the two components — the interest rate of the tax credit and the basic rate of spending on R&D of the company, which, in turn, is considered either in its total amount in the basic year or as an increment of entirety in the base year, or as R&D expenditures to the basic level of expenditures (average for the basic period — 2, 3 or 5 years). In literary sources the first type is called R&D volume based tax credit while the second type is briefly referred to R&D tax incremental credit. Each of these forms has its advantages and disadvantages.
The incremental form meets the objectives of stimulating R&D better as it encourages the growth of expenditures on R&D, but it is more difficult in calculating and registering for both entrepreneurs and the government as there are problems with how best to choose and define the basic level of expenditure on R&D. The increment of expenditures is later determined in relation with the basic level of expenditures. The tax credit in this form is more beneficial for enterprises on the stages of the project when the increment of R&D expenditures is going on. If R&D expenditures are significant but stable at the same time, enterprises lose this benefit. Large enterprises often criticize for this form because it does not take into account the cyclical nature of the research, the transition from one stage of the research to another one, the benefit of this tax credit is difficult to implement in long-term strategic R&D programs. However, this form is easier to target and use to encourage start-ups, small businesses. Finally, the main disadvantage of this form is that it provides companies with more opportunities for manipulation and abuse.
An advantage of the volume-based tax credit is that it is more simple and cheaper in registration. Large companies
with the big volume of R&D expenditures prefer this type of tax credit. However, this type is more expensive for the government as the applications for the tax credit are submitted by these enterprises which would perform R&D in any case. Therefore the government can lose a part of its revenues in vain as it partially compensates the enterprises their R&D expenditures.
Sometimes a mixed form of the tax credit can also be used. Its essence is that incremental tax credit (for example, with 50 % increment in relation to the average basic R&D expenditures for this period) is added to the volume-based tax credit (for example, with the 30 % from basic R&D expenditures).
Volume-based tax credit and mixed tax credits have become the most widely-spread forms in the world. France, Spain, Portugal use mixed form. Volume-based form is used in Italy, Canada, and Norway. France has rejected the incremental form since 2008. Incremental tax credits are used only in 4 countries.
Special regimes of depreciation of fixed assets connected with R&D. This measure is aimed at stimulating purchase of fixed assets needed for R&D. Normal depreciation supposes that the cost of capital assets is amortized over their lifetime. Benefits connected with capital expenditures on R&D are related to the calculation of depreciation. They consider primarily allowed amortization period of capital assets, taking into account of the economic lifetime. These incentives encourage businesses to invest in modern equipment, which contributes to the appearance and development of new products and processes. In some countries, the benefits of capital can be used in the same year, when the company gets the right to use them, but in other countries benefits can be taken into account in calculating a taxable profit during next years.
EU countries and the USA apply two types of social regimes of depreciation of fixed assets connected with R&D — free depreciation and accelerated depreciation. Free depreciation represents absence of the fixed write-off method. It supposes an opportunity of simultaneous and complete writes-off of all capital R&D expenditures during the first year. An additional privilege of the free depreciation in many countries is the enterprise can use deduction from the taxable base not only during the year of purchase of innovative capital assets but also during another period. Accelerated depreciation enables to write off relatively big amounts during the first year than during next years or reduces the terms of writes-off in comparison with their economic (actual) use. Both free depreciation and accelerated depreciation imply that the tax stimulation is a deferral of tax payments. Application of free depreciation and accelerated depreciation result in reduction of R&D costs.
Various countries prefer various types by the nature of incentives. Accelerated depreciation is envisaged in Austria, Belgium, Denmark, Finland, Italy, Portugal, Sweden and the USA. On the contrary, Ireland, Spain, Great Britain are allowed to use free depreciation. In France entrepreneurs are free to choose between these two systems.
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Innovative tax credit. By its efficiency this measure is close to the accelerated amortization. It enables to write off a significant part of the equipment cost during the first years of its operation. This measure aimed to stimulate the volume of investments in general is an important encouragement for innovations because it efficiently reduces the cost of investing in something new, more oriented to IT.
Tax concessions on salary of scientific researches. Encouraging a private innovative activity is performed through reduction of the employer’s costs on salary and wages. Taxes, entrepreneurship social contributions, reduction of income taxes of the researches are involved in these costs. Such instrument as R&D wage tax credit is used for these purposes. It is aimed at compensating relatively high costs, caused by high wages of researches, to employers. From the name of this incentive we can see that it reduces the amount of income taxes paid by researches and a tax on the wage fund paid by the employer.
Tax concessions on salary of scientific researches mean deduction from the income tax and social tax on the wages of researches in the amount determined by the credit rate. Tax concessions on salary of scientific researchers are beneficial for both an entrepreneur and the employee because labour costs are decreasing for the first one and disposable income and net profit are rising for the second one. In this way we can see double stimulation: encouragement of the businesses who are willing to direct more investments in R&D and reduce labour costs in the sphere where its share is relatively high as well as support of inflow of scientific employees in this sphere.
In general it should be noted that the volume and type of tax incentives is determined, first of all, features by the enterprise itself: its size, sphere of its activity, age, character of completed projects, and particular conditions of giving tax concessions existing in every country. Some concessions have a general character and can be used by any company performing R&D. Other ones aimed at stimulating either certain kinds of research or support of certain categories of enterprises can be applied only in case if the enterprise meets exact criteria, for example, if the company conducts a joint research in cooperation with the universities.
Volumes, kinds and conditions of applying tax concessions for enterprises by countries mainly depend on the goals pursued by the government when fixing tax stimulations for R&D, nature of the concession itself, economic efficiency of its use and peculiarities of tax systems of certain countries.
In case of Uzbekistan special tax instruments of stimulating innovations haven’t been implemented in practice yet, but there is an effective policy, developed by the government to encourage a certain category of taxpayers engaged in modernization, technical and technological re-equipment of the industry as well as participating in developing infrastructure of regions. The following tax concessions are applied to them [3, 58-74]:
• Educational and experimental centre of high technologies are exempted from the Value Added Tax by services provided by non-residents of the Republic of Uzbekistan (until January 1, 2017) [4];
• Enterprises of agricultural engineering during the development of the production of new types of equipment, components, assemblies and parts to them within the framework of the implementation of investment projects are exempted from the property tax in the part of fixed assets used for production of new types of machinery (for 5 years) [5];
• Enterprises-exporters depending on the share of export of the domestic production for freely convertible currency (excluding commodities) are given tax benefits on the profit tax and tax on property of legal persons in the following order:
- from 15 to 30 % in the total volume of realization — a fixed tax rate is reduced by 30 %;
- from 30 % and more in the total volume of realization — a fixed tax rate is reduced by 50 %.
• Newly established enterprises since its registration by the government are exempted from the property tax within 2 years;
• The followings are exempted from the VAT:
- import of technological equipment brought into the territory of the Republic of Uzbekistan according to the list confirmed in accordance with the legislation;
- import of property brought as investment obligations according to the agreement concluded between an investor and an authorized government agency on public property management;
- import of raw materials, commodities and spare parts used in domestic production brought by enterprises with foreign investments specialized in manufacturing children’s footwear.
• Certain concessions are given to enterprises with private foreign investments in such branches of industry as: radio electronic, light, silk production, construction, production of poultry and eggs, food, dairy, chemical and pharmaceutical;
• Enterprises located in the free industrial-economic zone “Navoi” are given the following tax exemptions: customs duties on brought equipment, commodities, materials and spare parts; land tax; property tax; profit tax; tax on infrastructure development; single social payment; compulsory deductions to the Road fund [6]. Conditions and terms of giving privileges depend on the volume of placed indirect investments in the amount:
- 3-10 million Euro — for 7 years;
- 10-30 million Euro — for 10 years. During the next 5 years the rates of the profit tax and a single social payment are fixed on the amount of 50 % lower than existing rates;
- more 30 million Euro — for 15 years. During the next 10 years the rates of the profit tax and a single social payment are fixed on the amount of 50 % lower than existing rates.
• Enterprises located in the special industrial zone “Jiz-zak” [7], special industrial zone “Angren” [8] are given the following tax exemptions: profit tax; tax on property of legal persons; tax on infrastructure development; single social
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On instruments of tax incentives of the innovative development in the economy of Uzbekistan
payment for small businesses; compulsory deductions to the Road fund; customs duties on equipment, commodities, materials and spare parts produced outside the republic. Terms of giving privileges are the following:
- 300 thousand-3 million USD — for 3 years;
- 3-10 million USD — for 5 years;
- more than 10 million USD — for 10 years.
Tax privileges mentioned above are stimulating investment activity in branches of the real sector of the economy of
Uzbekistan. However, it is not sufficient for creating a favourable investment climate in the country. Efficient tax instruments aimed at making enterprises increase R&D expenditures are needed to facilitate investment activity. Therefore, taking into consideration current tax policy conducted in our country we propose to implement in practice an appropriate tax instrument to stimulate innovations, customers of innovations, and specialists who create innovations in the scheme given in Figurel.
1. Proposed scheme of interplay of innovative company with the government agencies while getting tax benefits
Fig.
1) Determining status as «innovative». Committee for Coordination Science and Technology Development as the main government authority regulating innovative policy of the country in the field of innovations can give status “innovative” to the companies after conducting appraisal and audit of the business-plan of the innovative project of the enterprise.
This particular approach, i. e. considering the businessplan of the project by the committee before giving certain tax privileges will make the mechanism efficient and successful. As a result the State Tax Committee will not have a necessity to establish additional divisions on considering applications for these appraisals, employ new specialists — inspectors and organize their training, continuously renew instructions which highlight all issues related to the applications for tax benefits.
In other countries an application for the tax concession is a part of the tax return and all forms of submitting the application are developed by the tax authorities and all entrepreneurs are announced about them in advance.
If Committee for Coordination Science and Technology Development hesitates about anything it has the right to require from enterprises additional confirming documents.
Sometimes arguments about different opinions of the innovation development can occur. In our opinion, all entrepreneurs may get the tax privilege if they can correctly fill in the application. Moreover, it should be noted that the government not always has a possibility to check accuracy of the information. At the same time, enterprises cannot get tax concessions though they have sufficient grounds for it. As Professor B. Hall wrote in 2012 «Tax credits on research
caused a big deal of arguments between companies and tax authorities for last 15-20 years, many of which are referred to the notion of “qualified R&D”. At the beginning while registering TCR tax officers didn’t have enough knowledge and understanding about the feature of scientific research which was resulted in rejection of many applications. Currently many efforts have been made to train inspectors and those employees of the tax offices who are involved in TCR. On the other hand, the term “qualified R&D” has been clarified but this field undoubtedly will remain the arena for different opinions and struggle» [9, 19].
Therefore all countries seek for the ways of reduction these costs and one of them is the way offered by us when scientific projects are considered before giving a preference taxation. This way can be used only in case when there is a high degree of the independence of experts-members of the commission and there is absence of pressure made on them and corrupted administration.
2) Inform the State Tax Committee about the enterprises which have “innovative” status. Committee for Coordination Science and Technology Development will send to the State Tax Committee the list of enterprises which have an innovative activity. It is advisable to state in the reference forms the overall information about employed scientific specialists, innovative production, capital bases of the enterprise.
3) Submitting applications to the State Tax Committee. Once a year when the innovative enterprises submits an annual report to the State Tax Committee it also has to submit the report with the application for tax concessions about
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the innovative activity performed during the ending year with the notice of total amount of expenses.
4) Reimbursement of funds spent on R&D. Having received the application of the enterprise will refund the sum basing on benefits. In this case the account of the refundable sum is made according to the following parameters:
- enterprises should be fully exempted from the single social payment with respect to the specialists involved in research activities. Enterprises have their expenditures reimbursed only regarding those specialists who were directly involved in innovations during the ending year (in developed countries the single social payment has a reduced rate but there are no full exemptions).
- enterprises should have their R&D expenditures reimbursed. Application of this method will enable the enterprise to get an instant financial reimbursement, and the government, in turn, will have less budget revenues. However, we should take into consideration that that reimbursed sum must not exceed the amount of taxes paid by the enterprise by the Single Social Payment (for small businesses) and the tax on profit of legal persons. This form is especially efficient for start-ups.
5) Raising availability of the innovative production for customers. We should also consider an opportunity of the VAT exemption for the production of the innovative importance. This impacts on the pricing of the innovative production, raises its competitiveness and results in growing demand and, consequently, encourages its production.
6) Raising wages of specialists. Exemption from the single social payment in regard to the specialists of the innovative enterprises will enable raising the wages fund of the enterprise. It will result in raising wages specialists, make the potential scientific employees interested in research, and create new working places for future innovators.
Rules for obtaining tax benefits should be simple and clear to entrepreneurs because the sum of benefits shouldn’t be overlapped by the excessive cost of its registration (preparation of necessary documents, consultation with experts). The effectiveness of such a system depends not only on the
selected specific tax instrument, but also on its indistinctness and computation simplicity. The more complex the rules of its calculation are, the more possibilities for tax abuse exist. The system should be uniform, consistent in meeting the requirements of all levels of the enterprise. For example, Germany in the 90s of the 20th century has canceled the TCR because enterprises-innovators began unreasonably artificially divide themselves into small firms in order to obtain benefits intended for young innovative enterprises.
We should not be afraid of the loss of tax revenue. There is an argument in favor of the fact that the government can go to the temporary loss of that part of the tax revenue, which is equal to the sum of the size of the shortfall of tax incentives for R&D expenditures. These temporary losses will be fully covered with future benefit from higher overall level of scientific and technological capacity, which will lead to the production growth, labour productivity, and growth ofwell-paid jobs, exports and, accordingly, the growth of tax revenue.
We can make a conclusion that each of considered forms and methods of the tax regulation and stimulation of the innovative processes has its advantages and disadvantages on the support of innovation initiators which efficiency can be determined only by the level of the development of the economy where this measure is used. For example, if the incremental form of the tax credit on research is successfully used in the USA, Japan, South Korea, but France rejected it because of its inconvenience. Results of the analysis of the tax policy in Uzbekistan show that the refusal in the field of innovation activity of the national economy from the existing form of the tax stimulation of the innovative activity is very low. We can see that real reforms on improving the government mechanism of the tax stimulation of the innovative processes in the economy are needed. We propose to make the approach based on three principles: producers of innovative goods — by means of reimbursing their R&D expenditures, consumers of these goods — by exempting them from the VAT payments, and specialists who create innovations — by exempting them from additional taxation for charging income taxes.
References:
1. Global Survey of R&D Tax Incentives. Deloitte. Updated on July 2011. - Р. 12.
2. Voronin S. Tax stimulating of the investment innovative activity of the republic of Uzbekistan. Report on the Uzbek-Korean forum. - 2013. - P. 58-74.
3. According to the Resolution of the President of the Republic of Uzbekistan «On measures on establishing the centre for high technologies in Tashkent city with participation of the Cambridge University, Great Britain» dated from November 26, 2011.
4. According to the Decree of the President of the Republic of Uzbekistan «On Programme of further modernization, technical and technological re-equipment of the agricultural production for 2012-2016» dated from May 21, 2012.
5. According to the Decree of the President of the Republic of Uzbekistan «On establishing free industrial economic zone in Navoi region» dated from December 02, 2008.
6. According to the Decree of the President of the Republic of Uzbekistan «On establishing special industrial zone in Jizzak region» dated from March 18, 2013.
7. According to the Decree of the President of the Republic of Uzbekistan « On establishing special industrial zone in Angren» dated from April 13, 2012.
8. USA Innovation and tax incentives. - B. H. Hall, 2001. - P. 19.
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