Special economic zones in the world economy

• master-planning and development of SEZ
• designing and building of infrastructure
• attraction of potential investors
• management and operation of SEZ
• granting land to investors
• connection to engineering networks

In turn, this company is controlled by the Ministry of economic development of the Russian Federation, which is responsible for:

• implementation of general policy on SEZ (including legislation)
• attraction of potential investors and management companies
• approval and registration of investors
• signing agreements with investors and management companies
• control over execution of residents’ agreements

The law defines four types of special economic zones that can be established on the territory of the Russian federation:

1. Industrial special economic zones
2. Techno-innovation special economic zones
3. Special economic zones for tourism and recreation
4. Port special economic zones

The distribution and specialization of zones are as following:

1. There are five Techno-innovation zones that have been established in St. Petersburg, Tomsk, Tatarstan and two in Moscow, namely in Dubna and Zelenograd. The Saint Petersburg SEZ specializes in analytical instruments, Tomsk in industrial electronics and biotechnologies, Dubna in information and nuclear technologies, and Zelenograd in micro- and nano-electronics.
2. There are six Industrial zones which are located in the Lipetsk region, the Republic of Tatarstan (SEZ “Alabuga”), Kaluga region (SEZ “Ludinovo”), Pskov (SEZ “Moglino), Tolyatti and Sverdlovsk region (SEZ “Titanium valley”). The first concentrates mainly on domestic and industry appliances, SEZ “Alabuga” specializes on automobile industry components and products of the chemical industry, SEZ “Tolyatti” – on automotive industry, machinery and construction materials, SEZ “Titanium valley” – on industrial facilities and high-tech manufacturing.
3. There are thirteen Zones of tourism and recreation that have been opened in Southern Russia (Krasnodar, Stavropol, rep. of Ingushetia, rep. of Kabardino-Balkaria, rep. of Dagestan, rep. of Adygea, rep. of Karachaeva-Cherkesia and rep. of Osetiya), in the Asian part of Russia (Buryatiya, Irkutsk, Republic of Altay, and the Altay Region) and Vladivostok. All the tourism zones have been placed in extremely beautiful natural locations. However, it seems that these zones have not been developed for mass tourism. One should not be over-optimistic that foreign tourists will find these zones, excluding perhaps the tourism zones of Kaliningrad and Southern Russia.
4. Three port zones have been established to develop logistical hubs in Russia. These zones offer customs benefits and tax privileges to both the Russian and foreign companies which operate in the privileged ports. Until now, zones have been established in Murmansk, Ulyanovsk, and the “Sovetskaya Gavan” Port in the Khabarovsk region. It is interesting to note that Ust-Luga, the colossal sea port to be erected in the Gulf of Finland, has decided not to apply for SEZ status due to the large investments required (over € 100 mn) and non-clarity related to the governance of the port SEZ (Ust-Luga Company 2008).
5. "The old zones" of the 1990s do not operate under the general legislation on SEZs passed in the middle of this decade, but they follow their own legislation passed in the 1990s. These special economic zones of the 1990's operate in Magadan and in the Russian enclave Kaliningrad. Kaliningrad has been extremely successful in getting special economic zones.

The following activities are prohibited in special economic zones:

• extraction of minerals (except mineral water, therapeutic mud and other curative resources) and metallurgical production in compliance  with the All-Russia Classifier of Types of Economic Activities
• processing of minerals and processing of ferrous and non-ferrous metal scrap
• manufacture and processing of excisable commodities (except for passenger cars and motorcycles).

The aims of establishing special economic zones in Russia are the development of manufacturing industries, high-tech industries, tourism, health resort industry, port and transport infrastructure, technology development and commercialization of the results, the production of new products.

In order to attract entrepreneurs and businesses to Russian special economic zones special incentives are provided, and in recent years some are improved:

Initially special economic zones, except port zones (established for 49 years), were established for 20 years. However, since the year 2012 several amendments were made in the procedure for setting up SEZs and providing tax incentives to residents of zones in accordance with the Federal Law of 30.11.11 № 365-FZ, and now SEZs is established for 49 years.

A special regime of doing business is running in SEZ area:

• availability of infrastructure for business development (innovation, engineering, transport, social)
• free customs zone regime
• a number of tax benefits - reduced rates of income tax, property tax, etc.
• System Administration "one window" 

There are tax benefits for investors of SEZs both on federal and regional levels. Their volume depends on type of zone and legislation of a subject of the Russian Federation. Taxation is conducted according to the Tax code of RF.

Current legislation allows residents of SEZs to apply a special tax regime (for instance, simplified taxation). In this case, the resident should comply with special conditions of special tax regime application. Moreover, the list of tax benefits is not unified for SEZs, even it isn’t unified for zones of the same type. Thus, the comprehensive approach to taxation of residents of special economic zones cannot be fully applied.

 

Generally, tax benefits can be simplified to the following conditions (table 4)

Tax	SEZs	Russian Federation
Profit tax*	0 - 15.5	20
Property tax	0	2.2
Land tax	0	1.5
Transport tax (rub/h.p.)	0	10 - 150
Insurance contribution**	14	30
*depends on type of SEZ **applicable only to investors of techno-innovation zones

Table 4

Still, the structure of taxation for special economic zones is quite complicated, and also there is no reason to go into details concerning each special economic zone.

Profit tax. What is interesting, the residents of special economic zones of techno-innovation type and zones of tourism and recreation, according to the tax law of Russian Federation, can use a benefit of 0% Federal tax on profit gained from operations inside mentioned types of zones. Due to this, the companies are obliged to make “double” accounting - keep records on operations inside and outside SEZ separately. Furthermore, since the year 2012 the profit tax, payable to the subjects of the Russian federation, for the residents of special economic zones should not exceed 13.5% and may be lowered by the subjects of RF for specific categories of taxpayers

Transport tax. Transport tax is related to regional taxes. For example, tax concessions on transport tax of Moscow: residents of techno-innovation SEZ “Zelenograd” are exempt from paying this type of tax. Such benefit is offered for 5 years since the moment off registration of a vehicle. Besides Moscow, tax benefits are provided in Tomsk, Lipetsk regions, Krasnodar Territory, Dubna, Tatarstan.

Property tax. According to art. 381 of Tax code of the Russian Federation, the residents of SEZ are exempt from property tax for 10 years if its created or bought for operations on SEZ area.

Insurance contributions. For a certain group of residents of SEZs, reduced insurance contribution rates are set. During years 2012 – 2017 organizations that have the right for application of reduced tariff, pay the total insurance contribution of 14%. Thus, the residents of special economic zones save 16% from insurance contributions.

 In addition, to attract investors special economic zones provide guarantees of stability, prescribed by the Federal law on special economic zones of the Russian Federation. According to the article 38, legal acts of municipalities on taxes that worsen the situation of taxpayers (residents of SEZs) are not applied to residents of special economic zones during the operation of a contract.

To conclude, special economic zones provide a variety of benefits prescribed by the laws of the Russian Federation and they differ according to the special laws for each special economic zone. Now we will consider a certain special economic zone, its characteristics, legislation and trends of development.

3.2 Characteristics of special economic zone in Kaliningrad region

The Kaliningrad region is a special place due to its geographical location, and therefore, the federal government has always fed the region with administrative privileges. Kaliningrad was granted a free economic zone (Yantar Free Economic Zone) as far back as in 1990-1991. However, already in 1995 this free economic zone was terminated. In 1996, the Federal law of 22.01.1996 № 13-FZ «On the Special Economic Zone in the Kaliningrad region» sealed the status of Special economic zone (SEZ).

This federal law has provided an increased entrepreneurial activity in the region and has had a significant impact on the restructuring of the economy of the region - the creation and development of new competitive industries (automotive, consumer electronics, food processing, furniture manufacturing, etc.). The created conditions in the region allowed the economy of the Kaliningrad region to form a growth rate higher than the growth rate of Russia as a whole

During the time elapsed since the adoption of the Federal Law of 22.01.1996 № 13-FZ "On the Special Economic Zone in the Kaliningrad Region", the socio-economic and political situation has changed in many ways. Such basic regulations as the Customs and Tax Code of the Russian Federation and a number of other federal laws were adopted.

The changes occurred in the Kaliningrad region, Russia, and the world dictated the need to bring into existing the regime of a special economic zone in accordance with the realities. The result of active work at the regional and federal level was the adoption of the Federal Law of 10 January 2006. № 16-FZ "On the Special Economic Zone in the Kaliningrad Region and on Amendments to Certain Legislative Acts of the Russian Federation."

According to the Federal Law, the Special Economic Zone in the Kaliningrad region is the territory of Kaliningrad region that operates under a special regime of economic, industrial, investment and the procedure of free trade zone is applied until 2031.

In order to become a resident of special economic zone in Kaliningrad a legal entity should meet several requirements:

• A legal entity is created under the laws of the Russian Federation
• A legal entity is registered in the Kaliningrad region
• A company exclusively produces goods on the territory of the Kaliningrad region
• A company makes investments in the Kaliningrad region
• The investment project submitted by a legal entity meets the requirements established by the federal law.

In addition, Legal entities that apply special tax regime and financial organizations (such as credit and insurance organizations, professional participants of securities markets) cannot be residents of SEZ.

The investment should not be directed to the following purposes:

• Oil and natural gas extraction, services in this field
• The production of ethyl alcohol, alcohol products, tobacco and other excise goods (except cars and motorcycles) in accordance with the list approved by the Government of the Russian Federation
• Wholesale and retail trade
• Repair of household goods and personal items
• Financing activities.

In order to attract investment and businesses the SEZ in Kaliningrad provides special incentives and preferences for the residents.

1. The residents of SEZ apply special regime of profit and property tax, stipulated by the articles 288.1 and 385.1 of Tax code of the Russian Federation. During the first 6 calendar years since the inclusion of an organization in the register of residents, the tax rate 0%. From the 7 to 12 calendar years, the mentioned taxes are paid in amount of 50% of the rate, established by law.
2. The possibility of simplified procedures for obtaining Russian visas for foreign citizens – representatives of the SEZ’s residents.
3. The rent paid for the land by the resident of SEZ is fixed during the whole term of the lease
4. Special guarantees are provided, that the tax burden on residents will not increase
5. SEZ residents that import goods into the territory of the Kaliningrad region and place them under the customs procedure of free customs zone are exempt from the payment of import duties and VAT on goods imported. Moreover, such goods are not subject to non-tariff measures.

According to the official portal of the Ministry of industrial policy, development of entrepreneurship and trade of Kaliningrad region the register of SEZ in Kaliningrad region since 2006 124 enterprises were included, of which 96 are the current residents.

Picture 1

By the march 2013, the overall volume of investments in the projects of SEZ’s residents exceeds 75.5 billion rubles.

The structure of investments by types of economic activity is as following:

32% - production of foodstaff

22%-transport and telecommunications

12% - production of transport and equipment

8% - operations with real estate, rent and different services

Picture 2

6% - production of electronics

6% - chemical production

Picture 3

The amount of taxes paid by the residents of SEZ in 2011 totaled 4.6 billion rubles (picture 3)

To conclude, the special economic zone of Kaliningrad region provides attractive tax conditions for investors. According to the data above this region shows good and fast dynamics of development that in addition provide additional tax revenue for the government.

Conclusion

 

Thus, nowadays, economic zones have become a part of the global business practices and are an integral part of international economic relations. Special economic zones appear in the system of world economic relations mostly as a means to accelerate economic growth through increased international trade, mobilizing investment, technology transfer, information, deepening integration of economic processes.

The notion “special economic zone” is understood as a part of the territory of a country where special benefits and privileges, not applicable to the rest of the territory of the country, are provided, - special customs, tax and investment regime. In special economic zones, the government reduces the scale of its intervention in the economic processes. Special economic zones become an important component of international business activities.

The first zones appeared even in the past centuries. These free customs zones (free trade zones) emerged mainly in ports such as Hamburg, Bremen, Copenhagen. In these areas, the import and export of goods were not subject to customs duties. Export processing zones (industrial zones) refer to areas of the second generation, as they are connected with the service not only goods, but also of capital.

Technological areas - areas of the third generation (1970-1980s.), created around the major research centers. In such zones, national and international research and development, and production enterprises are concentrated, enjoying a uniform system of tax and financial incentives. Service areas represent areas with preferential treatment for business organizations that provide financial, economic, insurance, and other services.

The most widespread service areas are offshore and tax harbors. In such zones favorable monetary and fiscal regime are created.

It is possible to distinguish four major groups of incentives used in the special economic zones:

1. Customs incentives: reduction or elimination of tariffs, simplification of foreign trade operations;
2. Tax incentives: concessions on tax base, lowering tax rates, tax exemptions;
3. Financial incentives: lax credits, subsidies in the form of lower utility prices, lower rent payments
4. Administrative incentives: simplifying business registration procedures, mode of entry and exit of foreign citizens, etc.

In the United States special economic zones are widespread. The main types of operating zones are foreign trade zones, enterprise zones and industrial parks (or technoparks). There are more than 200 foreign trade zones, at least one at each state. And although the United States is a very open economy, the government still maintains a large number of special economic zones, which proves their importance. Enterprise zones help the poor regions (in order the territory to be granted the status of enterprise zone 70% of population should have income below median, and the unemployment rate should be higher than country average)   to revitalize by attracting business and investment. The industrial parks make the U.S. one of the leading countries and research and development. All these zones increase the welfare of U.S. regions and the competitiveness of its companies.

China is another example of a country that is actively using special economic zones for its development. China, separately, accounts for about 10-15% of all special economic zones in the world, although first zones were established in 1980s, more than a decade after the first zones in the world it outpaced other Asian countries who established SEZ programs in 1970s. Over several decades, special economic zones have led to transfer of population and provided employment, have facilitated economic and technological development of China.   

In Russia the previous attempts of creation and functioning of special economic zones, which began in the 1990s did not bring positive results to our country. The review of approaches to SEZ and the world experience led to the decision of setting up a Russian variety of SEZ, considering a specific domestic reality.

According to Art. 4 of the Special Economic Zone of the Russian Federation the following types of the special economic zones may be set up on the territory:

1. Industrial special economic zones
2. Techno-innovation special economic zones
3. Special economic zones for tourism and recreation
4. Port special economic zones

Nowadays 29 SEZs of four types are operating in Russia: industrial (6), techno-innovation (5), tourist and recreation (13), port zones (3) and 2 zones operation under special federal laws.

The process of creation and termination of SEZ is active in Russia. The new policy of SEZ begun in Russia only 6 years ago, thus promising many new special economic zones, termination of some existing, and rapid development of successful zones. The success, in turn depends on incentives the government will provide for the investors. It is possible to note that the government made amendments to the tax and law on special economic zones during the last years, which means that the attempts to improve the overall situation in SEZ are made and will be in the future.