Defining of terms for the application of tax benefits by IT companies

LEGAL DIGEST, NEWS \ 28.09.2021

The Ministry for Digital Development, Communications and Mass Media of the Russian Federation has published explanations of terms on the use of benefits by IT companies as part of a tax manoeuvre. 

These explanations define the content of such terms as “development”, “installation”, “support”. These concepts are used in Tax legislation to describe the activities of IT companies and allow such companies to apply tax benefits.

Explanation of the term “development”

In accordance with this document, software development is understood as a set of actions, the result of which are software tools. At the same time, software development includes the following processes:

1. Defining the software requirements that will be met by each software configuration element, and the methods that should be used to fulfill each requirement.

The process of determining software requirements provides a number of processes, for example:

• analysis of functional system requirements and requirements for interfaces that are intended for software implementation, for the absence of contradictions and discrepancies;
• registration for subsequent clarification or correction and transmission as input information of feedback to the original processes of those input data for determining requirements that turned out to be incorrect;
• determining of all top-level requirements that correspond to system requirements that are related to risk prevention and others.

2. Software design, in which the developer determines the design solutions of the software configuration elements level. He or she also develops software organization projects and checks the correspondence between the software modules and the requirements for its configuration elements.
3. Software coding, in which the original code of the software is developed. This process is considered completed if the original code complies with the organization and coding standards of the software, as well as if incorrect data is detected, feedback is provided to correct them.
4. Software integration, as a result of which the developed codes are used when linkage editing and uploading in order to create an integrated system. The integration process is complete if certain goals are achieved.

Explanation of the term “installation”

Owing to the lack of a definition of the term “installation” in the current legislation of the Russian Federation, the bodies of the Ministry for Digital Development, Communications and Mass Media (Russian acronym – Mintsifra) use the following interpretation of it:

Installation – an installed, mounted somewhere mechanism, device or system of mechanisms, devices.

An analogue of the word “installation” is the word “setting up”, whose task is to guarantee the readiness of a software product (a set of computer programs) for use in the environment intended for it. One of the results of performing works (rendering services) under the software product installation agreement is the realization by the customer of the power to reproduce such a software product. The setting up process may include such execution steps as:

• integration of the software product with the hardware and software environment;
• preparation, deployment, configuration and setting up of the hardware and software environment and software product;
• testing of the software product and development of algorithms of the customer’s systems in the software product.

Therefore, during the installation process, the work included in the development and support processes can be performed, as well as the necessary work on the adaptation of the software product.

Explanation of the term “support”

Support – actions of a software tool throughout its entire life cycle in order to maintain the efficiency of its operation.

For the best understanding of this concept, the Minttsifra recommends using the state standards GOST ISO/IEC 12207-2010, 14764-2002, 90003-2014.  The provisions contained in them are applicable to various types of software: embedded and system software, mass-production products and systems, mobile and server applications, cloudware, etc. The maintainer should carry out such activities as:

• development, documentation and implementation of procedures for carrying out actions within the framework of the support process;
• determining procedures for receiving, registering and tracking problem reports and providing feedback to the user;
• performing or establishing an organizational connection with the configuration management process to manage modifications in the system, and others.

And from this we can conclude that the process of software support can include a number of the following works (services):

• ensuring the working capacity and functioning of software, including during initial integration, testing, settings and changes;
• monitoring the functioning of software and eliminating errors in the operation of such programs;
• correction of errors, discrepancies, incidents, defects in programs;
• adaptation, assembly, installation, technical support of programs;
• audit of installed software and other.

The Mintsifra also notes that the incoming requests to the Ministry are related to the fact that organizations use concepts in contracts that are not mentioned in existing statutory enactments or normative technical documentation, but are similar in meaning and content (for example, a software package, configuration, testing, data bank, etc.). When determining the consequences of using such terms, it is recommended to proceed not from the form, but from their semantic meaning.

The most detailed information about the above-mentioned concepts is noted in the Letter No. P11-2-05-200-38749 of the Ministry dated September 7, 2021.

Please be reminded that within the framework of the current “Tax manoeuvre”, companies can count on the following types of state preferences:

• reduced profits tax rate of 3%;
• reduced rates of insurance premiums in the amount of 7.6%;
• VAT exemption for types of activities in accordance with sub-clause 26 of article 149 of the Tax Code of the Russian Federation.

These benefits can be applied by Russian organizations that carry out activities in the field of information technologies and meet a number of requirements.

In the matters of the application of tax legislation and the use of tax benefits, please contact Acsour specialists.