Professor Natalia Ivanova, Deputy Director, Institute of World Economy and

International Relations of RAS

‘Tax incentives for innovations’

2011 Russian–Finnish Seminar ‘Industrial Modernisation: Is it possible to boost innovations in

Russia?’ 27 October 2011

Outlines

1. R&D and innovation tax incentives –international experience

2. Russian system of innovation and different tax incentives

3. Policy options for the future

Economic theory foundations for innovation policy

Keynes: State needed for stability, regulation, budget programs vs. the ‘animal spirits’ of the

private sector.

Schumpeter: State needed for funding ‘conditions’ that will stimulate innovation in the private sector.

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Science, Technology and Innovation policy

Goals

• vs. Market failures

• for Big Science projects

• Radical vs. incremental change

• for New industries support

• for National systems of Innovation

• New view: Market making

• Policy implications & green growth

Policy mix

• R&D subsidies,

• Tax incentives

• Target structural change

• Antimonopoly regulation

• ‘Right conditions’ for innovation to thrive (investment in basic research, venture capital funding, public infrastructure, education)

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A smart innovation agenda, in short, would be quite different from the one that most rich governments seem to favour. It would be more about freeing markets and less about picking winners; more about creating the right conditions for bright ideas to emerge and less about promises like green jobs. But pursuing that kind of policy requires courage and vision – and most of the rich economies are not displaying enough of either (Economist, 2011)

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R&D subsidies and tax incentives for business R&D, % to GDP

Источник: OECD Reviews of innovation policy, 2007

0,05

0,10

0,15

0,20

0,25

United States(2001)

France(2002)

United Kingdom(2004)

Norway(2004)

Austria(2002)

Australia(2004)

Netherlands(2005)

Canada(2004)

Japan(2003)

0,00

R&D SUBSIDIES FOR BUSINESS ENTERPRISES

Tax incentives

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Business R&D, provided by tax cuts, OECD ОЭСР, 2008 г.

Innovation’s policy tracks for developing countries. Russian option

• Transplantation of advanced countries institutes for S&T&I as fast (and expensive?) track:

- Science in Universities- Venture companies- Special infrastructure- Special tax incentives

• Evolutionary modernization of domestic economy and institutions on the track to innovation friendly conditions: freeing markets, foreign direct investments, industrial policy, antimonopoly, anticorruption policy etc

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Russian Innovation System SWOT • Strengths• Growing number of

enterprises – general and in some regions

• Real experience of elaboration and implementation of innovation policy instruments (both on federal and regional levels)

• Historically high level of Science and Education

• Growing infrasrtucture for innovation activity

• Weaknesses• Low investment rate to GDP

and slow structural changes reduce demand for innovation

• Low level of industrial competition in many fields and regions, weak antimonopoly policy implementation

• Limited foreign direct investment and international cooperation in high tech industries

• Regular formal monitoring and evaluation of innovation policy measures for corrective actions have not been used

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Innovation system SWOT 2 • Opportunities• Focus on strategic

innovation support for economically advanced industries

• International trade and technology cooperation through global production chains and organizations like WTO and OECD

• Growing global market for engineering services (aerospace, ITC, software)

Threats• High competition on the

global high tech markets – advanced and developing countries producers

• State corporations domination in middle high tech industries

• Accent to direct government support of innovation development, nonmarket instruments of innovation policy

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R&D tax incentives in Russia: general overview

• Fragmentary, patchy and unstable character of incentives

• Different interpretation of current measures by enterprises and fiscal authorities

• Comlpex and very slow bureaucracy of tax administration

• Low efficiency of incentive systems in comparison with the growing burder of other taxes

Foggy perspective view of Skolkovo(s)

Moscow School of Management SKOLKOVOhttp://www.skolkovo.ru/

Non-Profit Organization Fund for Development of the Center for Elaboration and Commercialization of New Technologies5, 2 Baumanskaya Street, Moscow 105005,Postal address: Krasnopresnenskaya nab., 12, Entrance №6, office 735, Moscow, 123610

http://www.i-gorod.com/

2006 - The Moscow School of Management SKOLKOVO is organized2010 - Campus is opened. First EMBA&MBA graduate

22.05.2010 - A Foundation for Development of Skolkovo Innograd was officially registered in Moscow

Skolkovo Tax Heaven (Federal Law, September 2010)

• Social security tax credit (14% of normal level) or No VAT

• No profit tax• No Land tax• Time frame – 10 years form registration• Value limitation – up to Roubles 1 billion

annually for shipments

Skolkovo budget support

Direct budget support as in “Federal Budget 2012-2013 proposal to Duma”

• 2012 - 22,0 bln ruble 2013 – 17,1 bln ruble 2014 – 17,1 bln ruble

• To compare: Russian Academy of Sciences (central division)

2012 - 34,99 bln ruble 2013 – 36,4 bln ruble 2014 – 37,1 bln ruble

• Basic sciences (all an all) 2013 – 90,4 bln ruble

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Tax incentives in oil industry

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Налоговый режим в России существенно хуже, чем вНорвегии, но не из-за тяжести налогового бремени, авследствие его крайне неэффективной структуры в самыхчувствительных областях

Russian tax regime is significantly worse than Norwegian one,however, not due to heavy tax burden, but due to extremelyineffective structure in the most sensitive areas

Comparison of Oil industry: Upstream Tax Regimes in Russia and in Norway/ PWC presentation in IMEMO May 2011, available on www.imemo.ru

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Влияние налогов на степень извлечения запасовTax impact on recovery rate

Норвегия / Norway Россия / RussiaНалоги на финансовый результат не являются «налоговым тормозом» для современных технологийProfits or profits-like based taxes are not “tax breaks” for modern technologyНалоги от объема добычи / экспорта - это «налоговые убийцы»современных технологийProduction based taxes (MRET+ED) are “tax murderers” of modern technology

Вывод / Conclusion:Россия катастрофически хуже с точки зрения условий для внедрениясовременных технологий и других методов повышения степениизвлечения запасов

Russia dramatically worse for modern technology and other ways of recovery rate increased implementation

Two policy suggestions

• Strategic: re-consider balance between business environment measures and industrial-innovation-R&D policy programmes and instruments- force investment/GDP ratio from 18 to 30 %- financial institutions reforming (banking, pension system, stock market, exchange rate policy)

• Administrative: embark on process of policy learning– Build evidence based policy monitoring– What works and what does not works, and why?

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