Расчет налоговой нагрузки на условное малое предприятие. Analysis of the tax climate in Moscow and 20 major world cities

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1 Taxation of small business in a global market Moscow and major world cities

2 Разработка модели условного малого предприятия Survey objective Расчет налоговой нагрузки на условное малое предприятие Рейтинг мегаполисов по степени налоговой нагрузки, определение места Москвы Taxes are one of the critical factors that shape the investment and business climate of any major world city. But, how can one measure whether the tax burden borne by small business is commensurate with the scope of business activities that small enterprises engage in? And, is there a risk that excessive taxation could hinder the growth of small enterprises, which form the economic backbone of many major metropolitan areas around Оценка the world? What is the tax burden for small businesses in Moscow, and how does it compare to Предпринимателями its peers among other major world cities? и экспертами With the objective of answering these налогового questions, PwC, климата jointly with the City of Moscow Department of Science, Industrial Policy and Entrepreneurship, в своих городах has conducted a survey on the small business tax burden in Moscow and 20 major world cities, which are Moscow s peers given their comparable scale and level of economic development. Survey methodology Analysis of the tax climate in Moscow and 20 major world cities Modelling of a hypothetical small enterprise Calculation of the tax burden on the hypothetical small enterprise Rating of cities by tax burden, determination of Moscow s ranking Assessments by business people and tax experts of the tax climate in their cities 2 PwC

3 Model of a hypothetical small enterprise Confectionery Office Confectionery Confectionery The hypothetical small enterprise A chain of three confectioneries located in the city centre, owned by an individual who is a citizen of the given country Personnel In each of the three confectioneries there are: SHOP 2 pastry chefs 1 waiter 1 cashier The company also employs: SHOP 2 drivers 1 manager 1 accountant SHOP Main financial indicators OFFICE Hypothetical enterprise s assets 3 leased premises (confectioneries) Owned property: 1 premises (office) 1 passenger car 1 truck 3 computers production equipment Кондитерская Total in RUB (per year)* Total in EUR (per year) INCOME (excluding VAT) 68,106,640 1,643,500 EXPENSES: Rent 14,918, ,000 Utilities 828,800 20,000 Raw materials for candy making 20,720, ,000 Payroll 17,404, ,000 Other expenses 2,330,171 56,230 PROFIT BEFORE TAX 11,904, ,270 * EUR 1/RUB (Central Bank of Russia exchange rate as of 1 June 2013) Taxation of small business in a global market 3

4 Major cities selected for the survey For the survey, in addition to Moscow, we selected major cities from those countries that ranked highest in the Doing Business rating. Stockholm (Sweden) Oslo (Norway) Copenhagen (Denmark) Ottawa (Canada) London (United Kingdom) Washington (USA) Mexico City (Mexico) Bogota (Columbia) Rio de Janeiro (Brazil) Santiago (Chile) PwC

5 Helsinki (Finland) Tbilisi (Georgia) Moscow (Russia) Seoul (South Korea) Tokyo (Japan) Riyadh (Saudi Arabia) Bangkok (Thailand) Hong Kong (China) Kuala Lumpur (Malaysia) Ebene (Mauritius) Singapore (Singapore) Taxation of small business in a global market 5

6 Rating of major world cities by total tax burden* (EUR) Tbilisi Riyadh Bangkok Hong Kong Washington Santiago Ottawa Moscow (STS) Seoul Copenhagen Singapore Ebene Kuala Lumpur Mexico City Tokyo Moscow (general tax regime) Oslo Helsinki Bogota Stockholm Rio de Janeiro London 44,351 53,401 62,250 62,517 65,461 71,584 71,843 79,262 80,550 84,606 94, , , , , , , , , , , , , , , , , , , ,000 The following cities had the lowest tax burdens Tbilisi, Riyadh, Bangkok, Hong Kong and Washington and are the rating s leaders. Total tax burden per year (EUR) 62,250 53,401 44,351 65,461 62,517 Tbilisi Riyadh Bangkok Hong Kong Washington * Figures in the rating represent the total annual tax burden per small enterprise. 6 PwC

7 Specifics of small business taxation in surveyed cities The most helpful! Special tax regimes* for small businesses Among the rating s top five cities only Tbilisi offers a special tax regime, but it applies only to individual entrepreneurs, and thus does not apply to our hypothetical company. Generally, among the major world cities surveyed, special tax regimes are also available in four other cities: Moscow, Mexico City, Rio de Janeiro, Santiago. The most practical! Different basis for tax calculation In London, property tax is assessed on an asset s market value rather than its balance sheet value, which explains why London s property tax proved to be the highest in the survey. The most loyal! Absence of certain types of tax There is no transport tax in a number of cities. Among the top five, only Bangkok levies this tax. In Riyadh and Hong Kong there is no corporate property tax, while in Tbilisi employers are exempt from paying social security contributions. The most generous! Corporate income tax (CIT) rates In Riyadh, the rate of the CIT equivalent is only 2.5% because the business owner is a Saudi Arabian national. In the other top five survey cities, the CIT rate for the hypothetical enterprise ranges from 9.975% in Washington to 20% in Bangkok. * A special tax regime is a specific procedure for calculating and paying taxes, established by relevant legislation, which is more favourable for doing business. Taxation of small business in a global market 7

8 Major world cities: what the tax experts think Factors that are conductive to doing business: large population and developed urban infrastructure close proximity to government structures government support and subsidies, various loans, development institutions and other tools highly qualified labour force efficiently functioning governmental structures simplified procedures for company registration and amending articles of incorporation developed mechanisms for attracting investors Drawbacks of tax systems in some major world cities: lack of tax incentives for small enterprises high corporate income tax (CIT) rates strict limitations on qualifying profit and revenue levels that entitle small enterprises to apply tax incentives and special tax regimes 8 PwC

9 Tax preferences for small businesses: reduced tax rates various tax deductions investment tax credits simplified procedure for filing tax returns beneficial taxation terms in first several years after an enterprise is established ability to carry over of tax losses to previous periods Taxation of small business in a global market 9

10 Major world cities: what small businesses think Hong Kong offers simple and understandable tax rules and, so far, our company has not had any disputes with the local tax authorities... Over the past 5 to 10 years, Georgia has made enormous strides in the area of taxation. The number of different taxes due has dropped from 27 to just 6 If our company had the opportunity to change something in the tax system, we would offer tax incentives to those companies that are just entering the Moscow market, at least for their first year in business... The biggest problem area where improvements are needed is the time it takes to get clarifications from the tax authorities. Whenever I have to contact the IRS in Washington for a clarification on some tax issue, it takes them too long to get back to me My company in Santiago benefits from a special, favourable tax regime, under which we don t pay corporate income tax until dividends are paid out... In Bogota, unfortunately, the tax authorities don t understand the specific circumstances of each taxpayer. It s usually very difficult to prove that this or that expense is deductible Today, there is a vital need for tax reform, which should be aimed at fostering real economic stimulus for Moscow-based companies that are making long-term investments in fixed assets, technology and R&D, as well as in those sectors of the economy that the government has identified as strategically important for promoting growth (education, healthcare, science and others) PwC

11 Moscow versus its world city peers The analysis shows that Moscow ranks 15th among surveyed major world cities in terms of the small business tax burden. Small enterprises doing business in Moscow are eligible for four special tax regimes. Among Moscow s survey city peers, only four offer small enterprises special tax regimes: Mexico City, Rio de Janeiro, Santiago and Tbilisi. If the hypothetical company used for this survey were eligible for Russia s Simplified Tax System (STS), Moscow would then move up in the rating from 15th to 8th place (see graph on page 6). Tax burden breakdown for rating leaders Tbilisi 3% Riyadh Bangkok Hong Kong Washington 13% 0.4% 3% 6% 34% 11% 32% 97% 87% 90.6% 66% 57%...and in Moscow Moscow (STS) Moscow (general tax regime) 1 % 45% 31 % 1 % 2% Corporate income tax Property tax Transport tax Social security contributions 54 % 66% Taxation of small business in a global market 11

12 Moscow s special tax regimes Simplified Taxation System Available to companies and individual entrepreneurs that meet certain conditions (earnings of RUB 60 million or less per year, average headcount of 100 people or less, certain other conditions) Patent Taxation System Available to individual entrepreneurs for specific types of activity (services, retail, certain other types of activity) Unified Imputed Income Tax (applies only within New Moscow*) Available to companies and individual entrepreneurs for specific types of activity (services, retail, certain other types of activity) Tax system in the form of a Unified Agricultural Tax Available to agricultural producers that meet certain conditions (at least 70% share of earnings from sales of own agricultural output, certain other conditions) * New Moscow is an area covering about 1,500 sq km that was annexed to the City of Moscow in PwC

13 The Simplified Tax System is becoming increasingly popular within the business community. This is evident from the graph below, which shows a rising number of taxpayers in Moscow using the STS. Number of taxpayers using the Simplified Tax System and the General Tax System in Moscow 171, , , , , , , , , , ,454 99, Companies using the Simplified Tax System* Companies using the General Tax System** * Source: Report on the Tax Base and Structure of Accrued Taxes Paid in Connection with the Application of the Simplified Tax System - Form No. 5-STS ( statistic/statforms/) ** Data provided for small and micro-enterprises. Source: Taxation of small business in a global market 13

14 General findings In terms of the tax burden on small enterprises using the General Tax System (GTS), Moscow ranks 15th among the major world cities in the survey. Small enterprises doing business in Moscow are eligible for 4 special tax regimes. Among the surveyed cities, only 5 offer special tax regimes for small business: Moscow, Mexico City, Rio de Janeiro, Santiago and Tbilisi. If the hypothetical enterprise used for this survey were eligible for Russia s Simplified Tax System (STS), then Moscow would move up in the rating from 15th to 8th place. Special tax regimes are becoming increasingly popular among Moscow s small enterprises: over the past 5 years, the number of Moscow businesses using the STS has grown, while the number of businesses using the GTS has shrunk (see graph on previous page). 14 PwC

15 From the point of view of small business taxation, Moscow looks fully competitive and offers an attractive environment for doing business. The potential of special tax regimes in Moscow has not yet been fully realised to the greatest possible extent. Moreover, the ratio between revenue-based and headcount-based (up to 100 employees) eligibility criteria for applying Russia s STS (particularly in Moscow) is an issue for further discussion. Generally speaking, 100 employees could well earn more than RUB 60 million per year for a company, and thus the annual earnings threshold of RUB 60 million could be seen as a limiting factor preventing small businesses from taking full advantage of this beneficial tax regime. Taxation of small business in a global market 15

16 Contact information Alina Lavrentieva Partner Private Companies Services Leader +7 (495) Valeria Efremova Senior Tax Manager National Technical Group +7 (495) Daria Anisimova Senior Manager Marketing and Corporate Communications +7 (495) PwC Russia ( provides industry-focused assurance, tax, legal and advisory services. Over 2,400 professionals working in PwC offices in Moscow, St Petersburg, Ekaterinburg, Kazan, Novosibirsk, Krasnodar, Voronezh, Rostov-on-Don, Yuzhno-Sakhalinsk and Vladikavkaz share their thinking, experience and solutions to develop fresh perspectives and practical advice for our clients. The global network of PwC firms brings together more than 184,000 people in 157 countries. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers Russia B.V. All rights reserved. * PwC refers to PricewaterhouseCoopers Russia B.V. or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate legal entity.