The generosity of R&D tax incentives is inherently linked to the design of tax relief measures as well as business characteristics. It is possible to calculate the notional level of tax support per additional unit of R&D to which firms with defined characteristics are in principle entitled. In 2016, this level is highest for France, Portugal and Spain in the case of SMEs in both the profit-making and loss-making scenario (insufficient tax liability). The gap in the implied R&D tax subsidy rate for SMEs between France and Portugal and Spain is significantly more pronounced in the loss-making scenario. Refunds and carry-forward provisions are sometimes used to promote R&D in firms that may not otherwise use their credits or allowances. Such provisions can be more generous for SMEs and young firms vis-à-vis large enterprises. This is the case for France as well as Australia and Canada.
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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. 29 of the 35 OECD members, 22 out of 28 EU member states, and a number of other major economies give preferential tax treatment to R&D expenditures in 2016. France, the Russian Federation and Korea provided the most combined support for business R&D as a percentage of GDP in 2014. Some countries, which appear to give little support on the sole basis of direct funding, are in fact providing significant assistance through the tax system. This is the case of countries such as Australia, Canada and the Netherlands.
A comparison of public support provided in 2014 and 2006 shows an increase in the relative importance of tax incentives among 23 out of 32 countries for which data are available. Canada, Portugal and Hungary, starting from a high share of tax support, moved towards rebalancing their support mix, increasing their reliance on direct funding. Overall, tax support increased across most countries, with the exception of Italy, which significantly reduced its level of support, and Mexico and New Zealand which abolished their schemes. Finland operated a temporary scheme from 2013 to 2014.
An analysis of trends in government support for business R&D shows that several OECD countries such as France, Japan, the Netherlands and the United Kingdom have increased their reliance on R&D tax incentives since 2000. This trend has not been uniform, however. The relative importance of tax incentives declined briefly during the crisis in many economies, reflecting the demand-led nature of tax relief and its dependence on profits. For this reason, some governments opted for direct funding to mitigate the impacts of the crisis on business R&D. In Canada, a review of federal R&D support led to a small rebalancing of central government support. However, Canada continues to place significant emphasis on tax support, surpassed only by Japan and the Netherlands in 2014.
R&D tax incentives, direct support and business R&D intensity
Bubble sizes represent the total amount of support provided through expenditure-based R&D tax incentives in USD PPP. For example, in the Netherlands, tax support for R&D is just above USD 1 billion. Total government funding of business R&D is close to 0.2% of GDP and business R&D is about 1% of GDP. Across countries, R&D intensity in the business sector has a positive correlation (0.45) with the level of government funding of business R&D.