The Tax Compliance team continues its series of posts in which it talks about the application of increasing coefficients to certain types of expenses. The second such type is expenditure on the formation of the initial cost of fixed assets and intangible assets.
The essence of the benefit
Tax legislation establishes that expenses for the acquisition/creation of fixed assets (PPE) and intangible assets (IA) are accounted for for profit tax purposes through amortisation. The amount of monthly depreciation deductions depends on the original cost of the asset and its useful life. The initial cost of an asset includes the cost of its acquisition, construction, manufacture, delivery and bringing it to a condition in which it is fit for use.
When applying an increasing coefficient, the taxpayer has the right to artificially increase the original cost of an object by multiplying the actual costs of its formation by the relevant value of the coefficient. Thanks to such a benefit, given that the useful life of PPE and IA remains unchanged, an organisation is able to take into account depreciation expenses to a greater extent when determining the tax base.
However, it should be immediately specified that, according to the position of the Ministry of Finance of Russia, the increasing coefficient can be applied only to the costs that form the initial value of assets. The costs of its change, including as a result of completion, retrofitting, reconstruction, modernisation or technical re-equipment, cannot be increased by such a coefficient [1].
Relief before the tax reform
Until recently, the value of the increasing coefficient was 1, 5, and it was applied in determining the initial cost of the following objects.
- Fixed assets included in the unified register of Russian radioelectronic products related to the sphere of artificial intelligence.
The Ministry of Industry and Trade of the Russian Federation enters information into the register of radioelectronic products on the basis of an application of a person, in which the person must substantiate that the equipment being created by him is a Russian-made product. Confirmation of the attribution of radioelectronic products to the sphere of artificial intelligence (AI) is recognised as a corresponding mark in the register entry. The Ministry of Industry and Trade of the Russian Federation takes the decision to make the mark on the basis of a check of the information submitted by the manufacturer. At the same time, the legislation does not establish a specific list of documents and information required to confirm the attribution of radioelectronic products to the sphere of AI.
- Fixed assets included in the list of Russian high-tech equipment.
In order to apply an increasing coefficient on this basis, an asset must appear on the list of Russian high-tech equipment approved by a
decree of the Russian Government. The asset's compliance with the list items is determined on the basis of the codes of the All-Russian Classifier of Products by Types of Economic Activities and the All-Russian Classifier of Fixed Assets, as well as the presence of specific technical characteristics of the equipment as set out in the said act.
- IA included in the unified register of Russian programmes for electronic computing machines (ECM) and databases (DB) related to the sphere of artificial intelligence.
Information is entered into the register of computer programmes and databases by the Ministry of Digital Property of the Russian Federation on the basis of an application of the right holder of the corresponding intellectual property object. A corresponding mark in the register entry shall be recognised as confirmation of attribution of software to the sphere of artificial intelligence. The decision to make a mark shall be made by the Ministry of Digitisation of the Russian Federation on the basis of verification of the information submitted by the right holder. At the same time, the legislation does not establish a specific list of documents and information required to confirm the attribution of a computer programme or database to the sphere of intellectual property.
Benefit after the tax reform
In the summer of 2024, two important amendments were made to the Tax Code of the Russian Federation regarding the application of the increasing coefficient, which will come into force from 2025:
1. the value of the coefficient for all the above-mentioned favourable categories of PPE and NMA was increased to 2;
2. similarly to the expenses for the acquisition of exclusive and non-exclusive rights to software, which the TC team wrote about earlier, the requirement to classify computer programmes and databases as AI was abolished. It is noteworthy that identical requirements in relation to radio-electronic products were not cancelled.
Implications for taxpayers
It can be expected that the new parameters of the increasing coefficient will not only reduce the tax burden for organisations from high-tech industries, but will also make the application of the coefficient available to a wider range of IT taxpayers. At the same time, to further reduce the profit tax burden, companies may consider the possibility of applying a depreciation premium or an accelerated depreciation coefficient to fixed assets and intangible assets, which are put on the balance sheet in tax accounting with a doubled initial value. The latter, in particular, may be applied to equipment from the register of radioelectronic products and to software from the register of computer programmes and databases.
Despite the attractiveness of using an increasing coefficient for the formation of the initial value of fixed and non-material assets, taxpayers should bear in mind the following restrictions:
1. Where a loss is incurred on the sale of depreciable property the cost of which was formed using an increasing coefficient, such a loss is not taken into account for taxation purposes;
2. The simultaneous application of the increasing coefficient and the federal investment tax deduction to the same objects is not allowed;
3. Based on the position of the RF Ministry of Finance formed on similar situations, the new parameters of the increasing coefficient may be applied only to the initial value of PPE and NMA that will be put into operation after 1 January 2025. The legislation does not provide for retroactive application of the benefit [2].
[1] Letter of the Ministry of Finance of Russia dated 21. 12. 2023 No. 03-03-06/1/124572.
[2] See, for example, Letter of the Ministry of Finance of Russia dated 08. 08. 2023 No. 03-03-06/1/74309.
