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.
Scope of the figures presented
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 ninth 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 most up-to-date and internationally comparable figures possible.
Estimates reported in this website 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 cost of R&D tax incentive support
Tax expenditures are deviations from a benchmark tax system (see the 2010 publication Tax Expenditures in OECD Countries) and countries use different national benchmarks. The 2013 OECD questionnaire and subsequent surveys 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 typically reflect the sum of foregone tax revenues – on an accruals basis – and refunds where applicable, with no or minimal adjustments for behavior effects. Some countries 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. The 2015 edition of the OECD Frascati Manual incorporates a chapter dedicated to the measurement of R&D tax incentives.
For a definition of BERD and an explanation of acronyms and abbreviations, click here.
Estimates of the implied R&D 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). To provide a more accurate representation of different scenarios, B-indices are calculated for “representative” firms according to whether they can claim tax benefits against their tax liability in the reporting period (OECD, 2013). When credits or allowances are fully refundable, the B-index of a firm in such a position is identical to the profit scenario. Carry-forwards are modelled as discounted options to claim incentives in the future, assuming a constant annual probability of returning to profit of 50% and a nominal discount rate of 10%. Adjustments for ceilings on claimable R&D or tax relief are modelled whenever possible.
Marginal tax credit rates reflect the magnitude of marginal tax credit rates applicable to an extra unit of R&D spend across a segment of the business population (e.g. SMEs or large enterprises). Whenever caps and thresholds apply to eligible R&D expenditure or the amount of R&D tax relief, an attempt was made to compute weighted marginal tax credit (allowance) rates for SMEs and large firms, using available data or proxy measures for the distribution of eligible R&D spending. For reasons such as thresholds, marginal subsidy rates will also differ from the average subsidy rate that is relevant for firms, especially multinationals, deciding whether to invest in discrete amounts of R&D in a given country. Different measures can be relevant for different types of R&D investment decisions: the average at the extensive margin (whether to invest in a country), the marginal one at the intensive margin (how much to invest within a country at the margin).