Innovation

Measuring R&D Tax Incentives

 

R&D tax incentives have become an important policy instrument in several OECD countries and partner economies to encourage firms to invest in R&D. This page provides the latest indicators on R&D tax incentives featured in the OECD Science, Technology and Industry Scoreboard 2013.

 

 

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NEW! April 2014

 

Summary description of R&D tax incentive schemes

for OECD countries and selected economies, 2013

 

excel icon Excel version

 

Governments can choose among various instruments to promote business R&D. In addition to giving grants or loans and procuring R&D services, many also provide fiscal incentives. Tax incentives for business R&D expenditures include allowances and credits, as well as other forms of advantageous tax treatment such as allowing for the accelerated depreciation of R&D capital expenditures. Today, 27 of the 34 OECD countries and a number of non-OECD economies give preferential tax treatment to R&D expenditures and do so in many different ways. Click here for an overview of schemes used by countries to provide tax support for R&D.

 

 

The generosity of R&D tax incentives

Implied tax subsidy rates for R&D are influenced by business characteristics. Australia, Canada, France, Korea, the Netherlands and Portugal give more generous treatment to SMEs than to large firms. Some countries allow firms to benefit from tax incentives when they are not profitable enough to use them in the current period through refunds and carry-forward provisions, but few do so to a signifiant extent. In Austria and Norway, refunds by authorities effectively allow firms to benefit from incentives as if they were profitable. Such provisions tend to be more generous for SMEs and younger firms, as in Australia, France and the United Kingdom.

 

 

What is the tax subsidy rate?

The tax subsidy rate is defined as 1 minus the B-index, a measure of the before-tax income needed by a “representative” firm to break even on USD 1 of R&D outlays (Warda, 2001). For more information on how these measures have been constructed, click here.

 

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A more complete picture of government support for business R&D

In addition to providing grants, contracts and loans, many governments contribute to business R&D through tax incentives. In 2013, 27 OECD countries gave preferential tax treatment to business R&D expenditures. In 2011, the Russian Federation, Korea, France and Slovenia provided the most combined support for business R&D as a percentage of GDP. R&D tax credits were worth USD 8.3 billion in the United States, followed by France and China.

 

 

 

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Changes in tax support for business R&D 

Over 2006-11, the importance of tax incentives vis-à-vis direct support increased in 11 out of 23 countries for which complete data are available. Their share of support fell in many countries owing to the crisis-driven decline in business R&D. Mexico and New Zealand abolished their tax incentives but Finland introduced them in 2013. Falling profits at the outset of the economic crisis also reduced firms’ ability to claim incentives.

 

 

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R&D tax incentives, direct support and business R&D intensity

Below, bubble sizes represent the total amount of tax incentive support for R&D expenditures in USD PPP. For example, in the Netherlands, tax support for R&D is just above USD 1 billion. Total government support for business R&D is just above 0.2% of GDP and business R&D is close to 1% of GDP. Across countries, the correlation between the two variables is 29%.

 

 

 

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Definitions and measurement

New estimates of the cost of R&D tax incentives have been combined with data on direct R&D funding (R&D grants and purchases), as reported by firms, to provide a more complete picture of government efforts to promote business R&D. Across countries, R&D intensity in the business sector is significantly correlated with total government support for business R&D. This does not imply a causal relationship and there are notable exceptions. Germany and Korea have relatively high business R&D intensity compared to their degree of government support, while Canada, the Russian Federation and Turkey have high rates of support relative to countries with similar R&D-to-GDP ratios. In 2011, Finland, Germany, Sweden and Switzerland did not offer tax incentives but had very R&D-intensive business sectors. In 2013, Finland introduced an R&D tax allowance for the first time.

 

What is the scope of the figures presented here?

There are several ways to measure the value and generosity of R&D tax provisions. The OECD-NESTI data collection on R&D tax incentives, now in its fourth edition, attempts to identify and address subtle differences in the tax treatment of R&D, the relevant tax benchmark and measurement approaches. National experts on science and technology indicators have collaborated with public finance and tax authorities to provide the OECD secretariat with the most up-to-date and internationally comparable figures possible.

Estimates reported here exclude income-based incentives – preferential treatment of incomes from licensing or asset disposal attributable to R&D or patents – and incentives to taxpayers other than companies. Figures refer to incentives applied at a national level through corporate income taxes, employer social security contributions and withholding taxes for R&D personnel. Personal and consumption tax incentives are not included. While typically non-discretionary, some countries require pre-approval of R&D projects or accreditation by government agencies or third parties.

 

Estimates of the implied tax subsidy rate

The B-index (Warda, 2001) traditionally assumes that the “representative firm” is taxable and enjoys the incentive’s full benefit. An adjusted B-index is reported for a firm unable to claim tax benefits in the reporting period. When credits or allowances are fully refundable, the B-index of a company in such position is identical to the profit scenario. Carry-forwards are modelled as discounted options to claim the incentive in the future, assuming a constant annual probability of returning to profit of 50% and a nominal discount rate of 10%.

 

Estimates of the cost of R&D tax incentives

Tax expenditures are deviations from a benchmark tax system (OECD, 2010) and countries use different national benchmarks. The 2013 OECD questionnaire adopted a common reference framework based on full deductibility of current R&D expenditures and a country’s baseline treatment of capital investments. Available estimates are typically in terms of initial revenue loss (foregone tax revenues), with no or minimal adjustments for behaviour effects. Some only report claims realised in a given year (cash basis), while others report losses to government on an accrual basis, excluding claims referring to earlier periods and including claims for current R&D to be used in the future.

 

For a definition of BERD and an explanation of acronyms and abbreviations, click here.

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Presentations

 

Related links

Maximising the benefits of R&D tax incentives for innovation, OECD policy brief, October 2013

Reform R&D tax systems to boost innovation and help young firms, press release, October 2013

OECD work on knowledge-based capital 

OECD Main Science and Technology Indicators Database

OECD (2012), “Tax incentives for R&D and innovation”, in OECD Science, Technology and Industry Outlook 2012

OECD (2010), Tax Expenditures in OECD Countries

Warda, J. (2001), “Measuring the Value of R&D Tax Treatment in OECD Countries”, STI Review No. 27: Special Issue on New Science and Technology Indicators, OECD Publishing.

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