Fiscal Consequences of the Escalating Corporate Debt Burden in Russia

Abstract

As the debt burden of Russian businesses continues to increase steadily, the need to stimulate corporate capitalization and discourage the use of debt financing for tax optimization purposes has become increasingly urgent. Based on data from annual accounting and financial statements of organizations provided by the Federal Tax Service of Russia, this article presents the first comprehensive assessment of the tax consequences of limiting interest expense deductibility for both the Russian economy and across individual industries. The study proposes models for assessing the fiscal effects of limiting interest expenses as a proportion of both EBITDA and EBIT and concludes that limiting interest deductibility to 30% of EBITDA would increase state tax revenues by approximately 330-583 billion rubles (excluding financial and insurance sectors). This change in policy would affect only the relatively small proportion of companies (approximately 0.3-0.5%) with high levels of debt and would help in curbing erosion of the tax base when firms shift profit to jurisdictions with lower corporate income tax rates. It would also indirectly stimulate corporate capitalization by constraining excessive leverage. In comparison, capping interest deductions at 30% of EBIT would affect about twice as many companies and could negatively impact the economy, as it would affect firms with only moderate or “normal” interest expenditures. Sectoral analysis reveals that the primary tax burden from either approach would fall on wholesale and retail trade, manufacturing, transportation, and storage industries. Extractive industries, real estate operations, and information and communications sectors would experience only a moderate increase in tax burden, and such interest deduction restrictions would have minimal impact on organizations in other economic sectors. However, the relatively small number of companies affected by these rules in less debt-dependent sectors would nevertheless bear a significantly higher tax burden, which could materially influence their investment behavior and financial strategies, particularly in industries traditionally reliant on debt financing for growth and operations.