The Ministry of Finance proposes to increase corporate income tax differentially.

The Ministry of Finance has prepared options for raising the income tax for companies. They have spent more on dividends over the past five years than they have invested. For them, the tax rate can grow from 20 to 25-30%.

The Ministry of Finance proposes to increase income tax by 5-10 percentage points (up to 25-30%). For those companies that have paid more dividends than invested in the previous five years. This is a report to RBC by two sources familiar with the department’s proposals. But, according to them, the documents of. The Ministry of Finance does not specify which industries they may touch upon it.

In March, President Vladimir Putin called on the owners of large Russian companies to invest most of their funds domestically. In his opinion, instead of paying dividends and placing funds in “safe harbours”. Russian companies should “direct them to the development of their own or new businesses in Russia.” And the government now faces the challenge of creating favorable conditions for such domestic investment, he added.

Finance: Putin advised businesses to invest “better in a house.”

The Ministry of Finance considers the differentiation of the income tax rate. The interlocutors of RBC say. It has proposed to adjust the MET concerning the exchange price and. The volume of iron ore, coking coal, apatite concentrate, potassium, nickel, copper, platinum, and palladium mined. And the adjustment of the mineral extraction tax (MET) for metallurgical companies and fertilizer producers. 

Two sources of RBC in large metallurgical companies say that a combination of both options is not will exclude. An increase in the MET and income tax. The goal is to attract an additional 250-300 billion rubles to the budget in 2022.

RBC sent inquiries to the Ministry of Finance, the representative of First Deputy Prime Minister Andrei Belousov. The government, and large metallurgical companies – Severstal, NLMK Group, PhosAgro, UC Rusal, MMK, Metalloinvest, and Evraz.

 How can income tax increase?

The Ministry of Finance proposes calculating an exceptional coefficient according to the formula “dividends – investments – depreciation over five years”. Divided by the company’s capital.

If the coefficient is less than one, then the profit tax for the company remains the same. At the level of 20%. That is if companies spend more funds on capital investments than on dividends over the past five years. Then the tax for them will remain unchanged.

If the coefficient is from one to two, then the income tax will rise to 25%. This will affect Finance companies whose dividends exceed investments, but not more than twice.If the coefficient is more than two, then the tax will be 30%. For companies whose dividends are more than twice the investment.

Income tax

The increase in income tax will determine at the end of the tax period and credited to the federal budget.

An exception was made only for state corporations and their subsidiaries and. Companies in which the state’s share is more than 50%.

Subsidiaries of Russian holdings (the participation of a Russian company in them must at least 50%) may also exclude. Provided that over the past five years, divide payments to shareholders of the holding company do not exceed 50% of the number of dividends that. It receives from its own “Daughters”. This item allows not to calculate the tax on the mining subsidiaries of large companies to avoid double taxation. Said Dmitry Smolin, an analyst at Sinara investment bank.

 UC Rusal responded to claims of Vekselberg’s company on dividends.

According to Smolin, if the government approves such a scheme for raising the income tax. It will force to increase the rate to pay primarily by steel companies. which have spent almost all of their free cash flow on dividends in recent years and have recently passed invested less. And, for example, the aluminum company UC Rusal. which does not pay dividends. Will not b affected by the increase in the tax burden, he said.

Nevertheless, for metallurgists, the increase in the profit tax rate is less painful than the option. The adjustment of the mineral extraction tax since the basis for its calculation is the pre-tax profit and for the mineral extraction tax – the proceeds, Smolin noted.

Prosperity Capital Management

However, the director of Prosperity Capital Management. Alexander Branis, believes that the proposed differentiation of income tax is “a way to distort incentives for economic agents, and in a way that will make everyone feel bad. both the state and controlling shareholders and external investors.” According to him, in such conditions, companies will look for less transparent ways to withdraw profits.

Deteriorating corporate governance will be harmful to the development of the stock market. Especially now that the money of millions of private investors has finally come to the market. And a large number of IPOs are helping a variety of companies to raise capital.Branis in stress that the increase in income tax will not spur the growth of investments. But will lead to their decrease.

Since those attractive projects today will select due to the rise in the tax burden. They consider that the state has to declare a similar approach. To various companies for many years, regardless of their ownership. The differentiation between private and state-owned companies also raises questions. These proposals need to revise entirely, he said.

 How the Ministry of Finance proposes to correct the severance tax

Now the calculation of MET depends on the cost of the extracted raw materials. The MET for producers of fertilizers. Since the beginning of 2021, ferrous and non-ferrous metal ores have increased 3.5 times. But, according to the Ministry of Finance, the tax still falls short of the level in world practice.

Where the mining rent from the extraction of solid minerals is 3-5% of the proceeds of mining companies. while in Russia, it does not exceed 1-2%, wrote Kommersant “.

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