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Measuring Tax Support for R&D and Innovation: Indicators

 

Measuring R&D tax support homepage  |  Indicators  |  Measurement

 

Latest data, December 2019: Update of the OECD R&D tax incentive database with the latest edition of time-series estimates of government tax relief for R&D tax expenditure (GTARD) and implied marginal R&D tax subsidy rates across OECD and partner economies. The OECD STI Working Paper "Measuring R&D tax support: Findings from the new OECD R&D Tax Incentives Database" highlights the potential of the database as an analytical tool for assessing the effectiveness of R&D tax incentives in stimulating business R&D investment. 

 

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 2019, 30 OECD countries give preferential tax treatment to business R&D expenditures, up from 19 OECD countries in 2000. Over the 2006-17 period, total government support for business R&D expenditure as a percentage of GDP increased in 29 out of 45 countries for which data are available, with the Russian Federation, France and Belgium providing the largest support as a percentage of GDP in 2017. 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, Italy, Japan, Portugal and the Netherlands, where tax relief accounts for over 80% of total public support. A few OECD countries (e.g. Canada, Hungary, Japan, Spain, and the United States), provide R&D tax incentives at both central and subnational government level. In 2017, provinces account for nearly 30% of total tax support in Canada, whereas subnational R&D tax incentives play a comparatively smaller role in Hungary (16% of total tax support) and Japan (less than 1% of total tax support). 

 

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Trends in government tax relief for business R&D 

Time-series estimates of government tax relief (GTARD) highlight the extent to which governments support R&D through tax incentives over the 2000-17 period, relative to direct support measures (e.g. R&D grants and purchases), and provide a potential basis for identifying the onset of different provisions and the role of factors impacting on the demand for tax support by firms as well as their ability to claim it. From 2000 to 2017, the absolute and relative magnitude of R&D tax support increased throughout many OECD and partner economies, this increase often only being interrupted by the onset of the global financial and economic crisis. The volume of R&D tax support typically increased significantly following the first-time launch (e.g. Belgium in 2005, Ireland in 2004) or the introduction of new or redesigned tax relief measures (e.g. Australia in 2012, France in 2008, Japan in 2003 and 2013, the Netherlands in 2012 and 2016). Few countries rebalanced their support mix by increasing their reliance on direct funding (e.g. Canada, and Hungary) or maintained a constant level of R&D tax support (e.g. United States) during this period. The use of carry-forwards and refunds in case of insufficient tax liability, also shapes the evolution of government tax relief for business R&D (e.g. Ireland, where the utilisation of unused credits – carried forward or payable in three instalments over three years subject to an annual limitation– peaked after the financial crisis).

 

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The generosity of R&D tax incentives

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 national level of tax support per additional unit of R&D to which firms with defined characteristics are in principle entitled. In 2019, this level is highest for both profitable SMEs and large firms in France, Portugal and Chile. National and refund carry-over provisions determine the extent to which implied marginal tax subsidy rates differ between the profit and loss-making (insufficient tax liability) scenarios. To promote R&D in firms that may not otherwise use their credits or allowances, 18 OECD countries offer refundable (payable) or equivalent incentives. Provisions such as these tend to be more generous for SMEs and young firms vis-à-vis large enterprises, as in the cases of Australia, Canada and France. By contrast, R&D tax subsidy rates for SMEs can fall below those of large firms when countries offer R&D tax allowances and preferential corporate income tax rates for SMEs (e.g. China, Croatia, Lithuania), the value of tax deductions being linked to the rate of corporate income taxation.

 

Click here for more information on how implied tax subsidy rates have been calculated (pdf)

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Evolution of tax subsidy rates on R&D expenditures

Time-series estimates of these marginal tax subsidy rates allow for an analysis of country specific and aggregate trends in the provision and generosity of R&D tax support by firm size and profit scenario. A number of countries (e.g. Belgium, Chile, the Czech Republic, Iceland, Ireland, Norway, the United Kingdom) introduced R&D tax incentives for the first time during the 2000-19 period, and only few OECD countries (Estonia, Germany, Luxembourg and Switzerland) did not provide any form of tax support during those years. Some countries reintroduced R&D tax incentives (e.g. Portugal in 2006, Mexico in 2017). Others replaced their existing schemes with new tax incentives (e.g. Australia, Austria, Greece, the United Kingdom) or complemented their tax relief regime with additional incentives (e.g. the Netherlands in 2012, Hungary in 2013). Overall, implied marginal R&D tax subsidy rates increased significantly for SMEs and large firms in the OECD area between 2000 and 2019 independent of the profit scenario considered.

 

For more indicators and analysis, see reports and briefs.

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