Andrey Goltsblat: "What have the authors of the Skolkovo Project missed out"?"


The Skolkovo Law does not encourage global companies to move production to Russia, does not resolve intellectual property issues and the difficulties created by the Customs Union. Andrey Goltsblat, Managing Partner of Goltsblat BLP, explains in an interview with exactly what the authors of the project have missed out.

By Natalia Ishenko.

— What are the strong and weak points of the bill on the Skolkovo innovation centre that the State Duma approved at the first reading on 2 July?

— The main positive feature consists primarily in laws designed to attract companies and people to the Skolkovo innovation centre, envisaging tax benefits, a certain beneficial regime for those located there, provision of an infrastructure, housing, production areas and buildings.

It must be said that the idea itself is an attractive one. The law is rather an embodiment of the idea, so we can speak either about the quality of the idea or about the quality of its embodiment. Concerning the quality of the idea ... In my opinion, it is an excellent and interesting one and it is important that the instrument for its realisation be created. So far, there remain a number of questions preventing full realisation of the idea.

—  As we know, the Skolkovo project envisages exemption of project participants from profit tax, VAT and property tax for 10 years. Yet the bill states that the taxpayer loses these benefits if its total profits exceed 300 million roubles in the year following that during which its revenues top the 1 billion rouble mark. Do you think this requirement has been thought out properly? Is it beneficial to companies and research projects not tailored to quick returns?

— We have spoken to different clients that might participate in the Skolkovo innovation centre. There are several major issues that concern them. What happens at Skolkovo when the ten year tax benefits  expire? This question must be answered. Otherwise investors will not understand what to do afterwards. Ten years is a quite short period.

If the main form of activity is research that must be commercialised, most likely quite a long time will pass from when the research is launched — from three to five years. In essence, profits subject to the benefits will appear only in 3-5 years’ time. Hence there does not seem much sense in the zero tax rate from the time participant status is acquired. If ten-year profit tax relief were envisaged after the launch of commercial production or start-up of commercial production, that would be interesting.

— What do you see as the main risks associated with the Skolkovo project?

— Another question of interest to future participants — the fate of intellectual property rights, which has not, unfortunately, been clearly set out yet. We have Part Four of the Civil Code, providing, in some cases, for intellectual property rights to be belong to the state if the development is state-funded.

In this case, there is confusion over what will happen to the rights to intellectual property created on the territory of the Skolkovo centre, since virtually the entire project is state financed. At least, everything is currently structured  largely as a budget-funded project. Private investors might be drawn in, of course, but the law as it stands means that it will rather be philanthropy on their part.

The next issue is the lack of clarity surrounding the customs duties or, to be precise, refund of customs duty. The current version of the law provides for refund of customs payments. No procedure for refunding these duties is currently envisaged by the Customs Code within the scope of the Customs Union, which has duly come into effect. Most interesting is that, under the terms of the trilateral Customs Union agreement, duty paid on the territory of one member of the Union is distributed among all its participants. In other words, if I bring equipment into Russia and pay the duty, 51% of this goes to Russia and the rest to Belarus and Kazakhstan. Do I then have to apply for a refund to all these? Or will Russia assume the obligation to settle this matter with the other participants? This question remains open.

Moreover, another outstanding issue is when Skolkovo can be up and running. It will obviously take several years to build everything - an estimate of three years is given. For this reason, amendments were made in the draft for the second Duma reading in order to allow Skolkovo participants to carry out their research and development outside Skolkovo and enjoy the same benefits for three years.

— How willing will participants be to move to Skolkovo after three years?

— That is also a question. If, for example, I were to lease premises in Dubna, set up a business and settle in — why would I want to move to Skolkovo? But if you do not move to Skolkovo within a certain time, you will lose your benefits.

— Yet moving also involves costs?

— This is also unclear - whether they will be reimbursed somehow. Some might be able to set up production within these three initial years. Or will they just sit and wait for Skolkovo, without undertaking any industrial production?

— In your opinion, to what extent do the bills currently being considered by the Russian parliament on the Skolkovo innovation centre meet the scale of the set tasks?

— The main problem I see is commercialisation of Skolkovo developments. Proceeding from the law that has already passed one reading, the state will fund the project through a management company. The idea is to set up the management company in the form a not-for-profit organisation in which both the state and private sources will deposit funds. They cannot actually be called investors, since it is not possible to invest in a non-commercial organisation: you are not entitled to a stake, to shares, to equity or dividends. So if you deposit funds in a not-for-profit organisation, you forget about them and they go for development of this organisation, meaning development of the Skolkovo territory.

Considering the range of potential participants, we see several groups. First, there are individuals who will set up small enterprises and acquire participant status. The second group consists of the biggest international financial corporations, Cisco, Microsoft, Nokia, Boeing, and IBM. They will be pursuing their own interests. But what will attract these companies? With respect to small participants, everything is clear - they will be provided with an infrastructure; they have created a product and will manufacture it in Russia. As for the big company participants, it is not yet obvious how Russia will benefit from their participation if they transfer their research centres to Skolkovo. They will continue developing new technologies but it is important for us that they realise them and manufacture them in Russia, that Russian versions of Google, Hewlett Packard and so on emerge, and that their headquarters and production facilities be located in Russia. The law in its current format does not encourage these companies to continue manufacturing in Russia, since the special incentives to do so will disappear in ten years’ time.

It would be a good idea to provide for certain benefits after commercialisation is launched. An excellent example is provided in this respect by the motor industry. As soon as the Government adopted the resolution allowing car manufacturers to import car parts duty free, they all opened their own factories. In just three to four years, they were all up and running. Something of the like could also be envisaged for the output of Skolkovo participants.

There is another outstanding problem in the way the bill is worded. If you look at the types of activity, you will see “research” and “commercialisation”. 

Reading this literally, research and production may be carried out simultaneously in Skolkovo. Yet the definition given of a participant allows only for a person engaged in research. This is, most likely, a technical oversight.

— Apart from the benefits granted to Skolkovo residents, at the Forum in St. Petersburg, President Medvedev promised to abolish capital gains tax next year. Will this help Skolkovo?

— It is a good idea. Good not only for Skolkovo, but also for Russia as a whole, for long-term share portfolios. It is a very good idea but it will apply to everyone, not only Skolkovo, so the declared uniqueness of Skolkovo is not evident. If Skolkovo had a beneficial tax regime compared with other areas, this would be much more interesting for investors who want to invest in small start-ups. For this reason, if we can convince private investors that it is beneficial, effective and safe to invest in Skolkovo, all this will, of course, take on a different hue.

— In other words, the bill currently under consideration in the State Duma does not fully meet the scale of the set tasks?

— What the Duma is considering at the moment is only the first step. It structures the project, its management and functioning. It provides for certain blocks connected with tax benefits of being located at Skolkovo, but does not full embody the idea of Skolkovo’s appeal for investors. I believe this aspect should be worked up more precisely by the time of the second reading. As of today, it looks like the establishment of state-run Technopark. Even at the first stage, investors are likely to appear to finance projects, as well as people willing to move to Skolkovo and work there. If I knew a scientist who had an brilliant idea, I would also, most likely, willing say to him: “I am prepared to risk participating in the company’s capital and incur start-up costs; let’s take a look at what we have”. And I would probably invest. Why not, indeed?

— The timescale vagueness, for example?

— Timescale vagueness only exists in relation to tax benefits. Years will pass, but capitalisation might increase a hundred-fold. I lose VAT and other levy benefits, but the company is still there. The stake, the idea, its commercialisation. But we must, at the same time, secure intellectual property rights. This must be written into the law.

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