Taxation of Research Grants, or Support of Science, Russian Style

          1. Problem of dilution of grants. The current Russian system of grants has a lot of serious shortcomings. Among the most acute issues is the system of taxation of the subventions allocated by state foundations for research work. The point of this system is in the transfer of money administered by the state foundations (The Russian Foundation for Human Sciences, The Russian Foundation for Fundamental Research etc.) to individual researches and research teams via legal bodies. The law not only fails to foresee any direct transfers of money to individual persons which are engaged in scientific research, rather, it formally forbids them! In this way, though individual persons participate in grant competitions, who finally win the subventions for research projects, the money itself is transferred through organizations which have no relation to the above projects.

          The immediate outcome of this system is that the subventions for research grants follow directly to the slaughter-house of the legal bodies, which cut off a big part of the initial amount. Then the researchers, who are in the project, receive the resulting sums that are quite far from the financial reports of the state foundations. What we see here is a real dilution of the allocations for research. The recipients get quite a different amount of money from the worth of the research grant.

          The current system of grant taxation leads to a situation, when legal bodies suck up to the individual researches and consume a vast part of the state’s money. Meanwhile the state itself uses the legal bodies as a channel with which to bring back part of the research money as taxes. So that the state gives money for research with one hand and takes it back with the other. This system can by no means be normal since almost all foundations in the west act on absolutely different principles: the money is given immediate executors of the grant (individuals) and the money is exempt from tax. Russia has built up a very special model of financing research, which is very far from progressive western models.

          From all the above mentioned it’s clear that when it comes to stimulating research the Russian model of grant-issuing is much less effective than the western one. In fact, the gravity of the problem is in direct dependence of the losses born by the researchers from the transiting of the grants through various companies and organizations. If the losses are not large, the problem is hardly grave, but is the lost money is great the very viability of the current financing system is in question.

          2. Estimation of the research subvention losses due to taxation of legal bodies. Now we’ll examine in detail those leaks of money from the researchers which occur as a result of the ruling taxation system. A few facts, however, should be taken into consideration.

          First of all, the organization, through which the financing if being done, has a right to a “premium”. Its size is strictly limited, for The Russian Foundation for Human Sciences it’s not more than 15% of the entire grant, for Russian Foundation for Fundamental Research, not more than 20%. From the financial point of view the premium is explained by the company’s expenses for organization and technical support of the research project. But in any case, it’s a direct subtraction from the recipient’s income.

          Secondly, as soon as the money is placed at the legal body’s bank account, and takes a shape of the salary, it’s immediately subjected to such tax norms as deduction on salary. It’s another subtraction from the recipient’s income. It’s made automatically, as soon as the individual (researcher) becomes a legal body (organization). Now doubt that such a shift is heavy blow at the researcher’s motivation.

          Thirdly, the researcher’s salary is automatically subject to income tax. This procedure is also beyond his control.

          To make a clear picture of the financial losses borne by the researchers due to the transiting of the grants through legal bodies, we shall formalize the current system of taxation applicable to subventions allocated for research grants.

          If S stands for original amount of the research grant (gross revenue), while D is the amount which the researcher will finally get (net revenue), then their interdependence, according to the current tax system, may be expressed as follows: D=S(1-v)(1-b)(1-y)/(1+a) (1), where ν is the share of overheads related to the entering of the grant (costs of registration of the research by All-Russian Scientific Technical Information Center, the bank’s commission for salary transfer to the plastic cards etc.); α is the standard charge on labor remuneration (unified social tax); β share of the grant to cover the costs of organization and technical support of the project; γ is the income tax rate.

          Formula 1 clearly shows that the connection between the gross and net revenue of the recipient looks just like this: D=kS (2)

          Where k is the proportion quotient, or rather the efficiency quotient of the grant subventions and is calculated as: K=(1-v)(1-b)(1-y)/(1+a) (3)

          Quotient k is immediately related to quotient of losses  r=1-k, which is the dissipation quotient of the grant subventions. R will be further on treated as tax burden as well, which corresponds to its in-depth meaning, for dissipation of the financial resources is mainly due to the functioning of the fiscal instruments.

          The received equations reproduce the current book-keeping taxation system of grant money and afford simple estimations. For that purpose let’s use the following values of parameters contained in formulas (1)-(3). The share of overheads ν includes registration of the research by the All-Russian Scientific Technical Information Center, the bank’s commission for the transfer of salaries to the plastic cards and deductions for the cost accrual of the material reserves of the organization. As a rule the amount is not significant and for medium-sized grants is: ν=3-4%. Standard charge on labor remuneration α (unified social tax) as of today is: a=26,2% of the amount of salary. The share of the grant β, dedicated to financial organization and the technical support of the project is (for The Russian Foundation for Human Sciences): b=15%. Though the regulations qualify the share of 15% as the limit (formally it can be just zero), in practice it’s exactly the share applied to the grant subventions. The standard income tax as of today is: γ=13%.

          After applying the above values of the parameters, to estimate the efficiency of the research grants in Russia is an easy job. We’ll take the specific amount for: ν=3,2% and use the formula (3):

 K= (1-0,032)(1-0,150)(1-0,130)/1+ 0,262=0,968*0,850*0,870/1,262=0,567 (4)

          So, the efficiency quotient of the grant subventions is: k=56,7%. Accordingly, the quotient of dissipation of the grant subventions is: r=43,3%. If we take for an example The Russian Foundation for Fundamental Research, by which β=20%, the amounts will be 53,4% and 46,6%, accordingly.

          Therefore, today’s Russian tax system is tuned in such a way, that nearly 50% of the issued grants return to the state treasury. Such a tax burden is deemed prohibitively high even for legal bodies practicing commercial activity. In a similar manner this magnitude is hopelessly overdone for individual persons. We can see that the tax burden laid on the grant subventions cannot meet any international or Russian standards. And if we take into consideration that the grants themselves are a specific form of charity (in our case, a state charity), such a tax system appears merely absurd.

          3. Conversion of individuals into legal bodies: economic and juridical collisions. As of today the federal law “On Alterations to the Clause 217 Part Two of the Tax Code of the Russian Federation” №38-FZ of March 23, 2007, is in force. According to it, an alteration concerning the taxation of grants is introduced into the Tax Code of the Russian Federation. According to the new version of the Tax Code, exemption from taxes is extended to the incomes of the individuals, received by the tax-payers in the way of grants (free aid), issued for the support of science, education, culture and art in the Russian Federation by international, foreign and/or Russian organizations, which are enumerated by the lists of such organizations endorsed by the Government of the Russian Federation. The new rule of taxation is to come into force on January 1, 2008.

          The main feature of the new system is the introduction of tax benefits no only for international and foreign, but also for Russian organizations, which issue research grants. The step can be qualified as absolutely correct and more than timely. At the same time, while introducing the taxation benefit for individuals, the Russian law fails to foresee the key item: abolition of the procedure of conversion of individuals into legal bodies. Precisely this procedure is the main crisis point of the Russian grant system. Now, we’ll examine this issue in more detail.

          First of all, the benefit for the individual income tax does not cover the tax burden originating from the transition of the researchers under the auspices of the legal bodies. According to our calculations, the abolition of the income tax on the grant subventions under the current conditions leads to an increase of the efficiency index k from 56,7% to 65,2%. So that the total tax burden for the researcher will be cut by 8,5 percent points (pp). However, the separation of the researchers from the structure of the legal bodies and their return to the original status of individuals could help, even under a continuing income tax, raise the efficiency quotient k from 56,7% to 87,0%. In this case the tax advantage of the researchers could be 30,3 pp, which is 260% more than the advantage from the economy of income tax. This is how the Russian state once again attempts a cosmetic modification of the tax system, keeping all its inner deficiencies intact.

          Secondly, in driving the Russian researcher into the frames of legal bodies, the Russian state makes steps which are economically and legally improper. For example, while exercising charity in issuing a grant, the state finds a legal body, which, apart from becoming a channel for money transfer between the state and the researcher, acts as his employer. In that capacity, the legal body is obliged to pay all the appropriate taxes. Withal, it’s obvious that such an organization cannot in any way be an employer and the researcher cannot be an employee while being a grant recipient. The entire situation is fundamental economic and legal mistake. Incidentally, neither the state itself in this situation is an employee towards the researcher. It does not employ him, but buys the product of his word and pays a mutually agreed amount. This is the deepest meaning of the competitive system of grants issuing. Although, since the grant to be received by the researcher is after all his income, the most the state can claim is an income tax. In many cases grant subsidies get the status of charities which abolishes even this tax.

          Thirdly, the grants system as it is, meant to support free researchers, is in flagrant contradiction with the current method of issuing the grants, targeted in its turn at the researchers, strictly linked to this or that organization. The above mentioned inherent meaning of the competition for grants is also in the elimination of the legal bodies. Moreover, this system also means that some researchers may in time even lose a permanent job, but still go on working over the received grant and participate in new competitions. To the contrary, the current practice tends to link individual researchers to organizations in a kind of serfdom to a financial tap for their projects. In today’s Russia an unemployed researcher which cannot agree with any organization for a financial “pumping” of his project, automatically loses all rights to the grant itself.

          Fourthly, the grants system was originally targeted at strictly individual researchers and their small-scaled teams engaged in specific projects, while the Russian system initiates work with mass researchers. Such contradiction is a direct consequence of introduction of legal bodies into the grants system. For example, a big research institute or a university whose members have won a grant, formalize the whole documentation in such a way that it reflects the financial profile of all the participants of the project. Sometimes the exception of one member of the list which can occur for different reasons automatically breaks up the documentation of all the others. Hence is the contradiction between the individual character of the research grants and the mass, or conveyor, character of the system of the financial accounting of the legal bodies.

          The above examined aspects of taxation of grant subventions show that at this moment we witness a completely deformed system of relationships of various economic entities: state, researcher (individual) and organization (legal body). All the same, such a system of relationships is profitable for the Russian state, because it operates as an instrument of saving, or rather, bringing back the state’s money.

          4. The function of the state’s confidence to the population and the outline of a new system. The operation of the Russian state foundations' for financing research has proved utterly faulty in these last few years. The introduction of legal bodies in the process of financing of individual grants is irrational. Why is it so?

          Our opinion is, it’s directly connected with the absence of the state’s confidence to its citizens. The state believes that it can only enter into an agreement with an individual under a guarantee of a legal body. An individual researcher, as a rule, has no bank account, no office, no financial accountability, and cannot be trusted by definition. The state permanently suspects the research of a wish to appropriate money without turning out any work for it. There is no other explanation for the state’s reluctance to deal directly with the researchers. Unlike the state foundations, the western ones pursue their activity on the principles of direct financing of the researchers. Moreover, many of them absolutely refuse to deal with any legal bodies. Indeed, many western foundations favor family grants, that is, when married couples or parents and children conduct joint research in the chosen field. And the western foundations are never afraid of the notorious research families to fail on their commitments!

          A similar case of the Russian state’s mistrust to the population is the recently introduced system of maternal (family) capital, according to which the state, starting from 2007, deposits 250 000 rubles in the bank account of each woman who has given birth to a second (third) child, although the money can used only after three years after the deposit is made and with many restrictions[1]. In that case the state suspects the women (partly not without grounds) of a deceitful intention to place the child in a children’s home after receiving the money. Here the otherwise progressive and useful initiative takes on the same deformity as in the case of grants.

          One more simile of the state’s flagrant mistrust to its citizens is the requirement that one parent should formally authorize the other one to travel abroad with a child (the country and dates should be endorsed by a notary). It’s a clear violation of the innocence presumption, and each Russian parent is suspected of potential export and sale of his/her child. Such regulations create immense everyday hindrances, first of all to ordinary law-abiding citizens. Although the attempt to protect children from possible criminal offences should as itself be qualified as positive, its manifestations cannot fit into the framework of reasonable legal and economic mechanisms.

          In all the three cases: in the grants system, in the maternal capital and the travel authorizations, we are a deficit of the state’s trust to its citizens. Such a stance may, of course, be excusable due to an unruly behavior of many Russians, but in any case the state itself should make the first step of trust to its people. While standing on the old ideological platform of extreme mistrust it’s impossible to build up such democratic institutes as the competitive system of research grants. Therefore the progressive restructuring of grant taxation system is impossible without a radical change in the current ideological position.

          There is one more prejudice which is underlying the current defective system of transiting the grants through legal bodies. The matter is, that due to the intermediacy of legal bodies the state retrieves part of the money issued for the support of domestic researchers. And such a result will certainly be appreciated as an achievement by the upper tiers of power. But such a result could be attained by another, simpler way: by issuing smaller amounts to the state scientific foundations. If a certain amount of money is allocated for a research purpose, then some definite specific necessity of the country is behind it, so that to perform an indirect sequester of the allocated amounts is not only inconsequent, but also dangerous, since it can destroy the still weak sector of the Russian science. Therefore, to give up a complex tax game in relation to the research grants is an immediate condition of building up a normal system of support for the science.

          We can suppose that one of the reasons for instituting the grant system based on participation of firms and organizations is the technical impossibility to finance individuals out of the country’s budget. However, that is not true. Nothing prevents us, for example, from conducting grant tranches out of the country’s treasury immediately to the researchers’ accounts in Sberbank, which has branches in all regions of Russia. In principle, this system is little different from the existing system of bank transfers to legal bodies, which mostly have accounts in the selfsame Sberbank. It appears that we still have to overcome the prejudice of technical preference of financial operations with legal bodies.

          The resume the above, three simple principles of the grant system should be observed in its formation: maximum trust of the state to individual researchers; the authorities’ abandonment of concealed fiscal instruments as means of saving on science; active introduction of modern finance technologies in the budget’s interaction with individuals. Otherwise, the permanent “retrieval” of half of allocated money (grants) can strongly de-motivate Russian researchers, which are largely responsible for the building up of a modern national economy of innovation type.

Balatsky Evgeny ,
31.07.2008. Views: 2189

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