In a televised address to the nation Tuesday, Putin also announced big tax cuts for the IT sector, apparently a bid to “turn Russia into India” by using tax incentives to attract and retain tech entrepreneurs. Putin claimed that, even in the midst of a pandemic, it was clear how the Russian IT sector has “powerful technologies and human capital opportunities.”
Putin said interest rates on insurance payments for IT companies will be lowered from 14% to 7.6% while they will also see corporation profit tax slashed from 20% to 3%. This is even better than “jurisdictions like India and Ireland,” according to Putin.
The new profit tax rate is comparable to Cyprus, a favorite location for Russian IT companies (in Cyprus it’s 2.5 percent). But it’s higher than Belarus where the rate is 0% and President Alexander Lukashenko wants to build a local ‘Silicon Valley’.
The initiative is part of major reform of the IT sector and the personal initiative of Prime Minister Mikhail Mishustin, according to a Kremlin official and a government relations specialist at a major IT company. Mishustin has “big plans to develop IT in Russia, and is always pushing the idea that IT is the most important driver of the economy”, one of these sources told The Bell. The tax breaks will hopefully become part of a major tax reform making it unappealing for companies to locate their businesses in offshore zones, according to two IT entrepreneurs from Russia who took their businesses abroad.
The day after the announcement it became clear the proposal was not as straightforward as many thought. Kommersant newspaper reported the government could increase VAT on software in a bid to compensate its losses from the tax breaks. Unsurprisingly, it is the companies that stand to gain most from paying less tax that make most of their money from software development — including internet giant Yandex.
Unease about Russia’s IT brain drain is justified: there are dozens of IT entrepreneurs who have moved abroad (from Playrix to Revolut). Taxes play an important role in such decisions, but they are usually not key. Political predictability is no less important, and so is an impartial court system. Russia lacks both of these.