While economies around the world struggle out of the economic downturn, many businesses are continuing to invest significantly in research and development (R&D).
These businesses realise that cutting R&D budgets can limit future growth. But to stretch budgets further, companies are evaluating not just how much R&D to conduct but also where to do it.
Tradition dictates that R&D should be near at hand, but looking outside your home country can often lead to both highly qualified and less expensive labour, as well as attractive jurisdictional incentives, such as R&D tax credits, tax deductions and grants.
Although certain countries, such as the US, have historically been leaders in R&D, many other nations, not least in the Asia-Pacific region, are enhancing their incentives and successfully drawing in major R&D investments that help build the credibility of their countries’ economies.
In fact, governments often see R&D as a key factor in spurring economic growth. They hope that improved R&D incentives will attract quality jobs, quality people – and still more R&D investment. But although there is broad agreement that R&D incentives help create jobs and boost the overall health of the local economy, incentives vary greatly between countries, and between states within countries.
Countries use two main types of inducement to encourage R&D:
- Tax credits
- Tax deductions.
Tax credits typically act as a direct reduction of a company's tax liability; however, in a limited number of countries, tax credits may actually become refundable when no tax is due. Tax credits tend to be more valuable than tax deductions because the credits directly offset tax liability.
Additionally, in certain countries, local jurisdictions offer additional tax credits that enhance national incentives. As an example, nearly half of the US states offer a tax credit over and above the federal credit. Canada is another example where provincial credits may also be available.
R&D tax deductions allow taxpayers to deduct certain qualifying R&D expenses from their gross income, typically in the year incurred. Many of the countries that offer an R&D tax credit also allow current expensing of R&D expenditures, so creating an enhanced benefit.
Sample incentives on offer
Many countries offer tailored additional incentives in numerous forms, some incorporating tax credits or expense deductions. For example:
Turkey offers an R&D allowance to enterprises that increase their R&D spending over the previous year. A 100% tax deduction on R&D is also offered for qualifying companies. Additionally, companies can benefit from ‘technopreneurship’ capital subsidies on personnel working specifically on R&D.
The Board of Investment of Thailand grants a promotion to qualified biotechnology projects for basic research, applied science, experimental development and R&D. The country offers a 200% deduction for the cost of hiring qualified researchers working on R&D projects; and an initial depreciation on the date of acquisition for machinery used in R&D projects.
Taiwan offers income tax credits amounting to 15% of the qualified R&D expenditure of companies performing R&D within Taiwan. This credit can deduct up to 30% of the income tax payable in the concurrent year of R&D expenditure. Unused credit becomes ineffective and is not allowed for deductions in following years.
In Poland the government provides subsidies for any type of applied research or development activities that result in a new product or service being introduced into the market. The country allows companies to deduct 50% of qualifying expenditures related to new technology.
In the US tax credit and tax deductions are offered for R&D expenditures and vary from state to state. Tax incentives sparked development of the biggest global high-tech construction project currently being undertaken. Tech Valley – a 19-county region of eastern New York state that spans from just south of Montreal to just north of New York City – is being established to attract high-tech companies worldwide, especially from Europe and Asia. Tech Valley already has a reputation for R&D in nanotechnology and biotechnology, in particular. “That's the power of incentives in attracting global investment," says UHY Advisors’ technology managing director Mike Lipschultz.
Different US states offer different incentives. In Houston, Ted Clark, national director for state and local tax services, UHY LLC, says: "State R&D tax credits range from 3% to 12% of the net new expenditures and many states follow the federal ‘look back’ period of up to four prior years, enabling companies to realise significant refunds from prior years. In addition, many states allow companies to carry forward credits for as many as 10 years.
"It's also important to remember that state and local governments offer incentives that supplement R&D tax credits, such as tax and non-tax incentives (cash grants) for capital investment, job creation /retention, infrastructure, employee training, utilities and green energy incentives."
Argentina offers tax credits to all companies performing R&D; larger credits go to small and mid-sized companies. Large incentives are also offered to the software, biotechnology, biofuel, mining, hydrocarbon exploration, and certain automotive and autoparts industries.
Australia offers tax incentives to companies registered with the Industry Research and Development Board. A 125% deduction of R&D expenses (which can be larger for small companies) along with a credit (only allowed for small companies) is allowed. Unlike most countries offering R&D tax incentives, Australia allows amounts that qualify for the credit to be spent in Australia and abroad (with certain limits). Where the applicant is incurring tax losses, the tax credits are paid to the company in cash.
“This is a wonderful stimulus of trading tax losses for cash and assists the development of R&D," says partner Allen Bolaffi, UHY Haines Norton, Adelaide.
Belgium deducts expenses related to new patents: under certain conditions, 80% of the revenues of patents are free of taxes. Grants for financing tangible and intangible assets can be obtained and profits are free of taxes to a maximum of the grants. There is also an opportunity to convert certain deductions into tax credits.
Brazil also deducts expenses incurred in a technological innovation project, at between 60% and 80% depending on the number of research employees hired. No researcher needs to be hired to enjoy the minimum 60% deduction. A further 20% deduction is allowed when a patent is granted.
Tax reductions of 50% are granted on the purchase of machinery and equipment for R&D. This deduction is made directly on the purchase and so the amount is not paid, generating an effective gain in cash flow.
Canada allows scientific research and experimental development credit equal to 20% of qualifying expenditures. It is creditable against tax liability or, in the case of Canadian-controlled private corporations, 35% is fully refundable.
Hong Kong offers a deduction of R&D expenses in the year in which they are incurred.
Ireland has an R&D tax credit system which effectively provides a write-off for R&D expenditure of 37.5%. The credit may be claimed within 12 months of the end of the accounting period in which the R&D expenditure was incurred.
A tax credit is also available for construction or refurbishment work carried out on a building used for qualifying R&D activities. The credit is equivalent to 25% of the qualifying cost of construction or refurbishment and may be claimed in full in the year in which the expenditure is incurred.
“The expenditure must be tax deductible in Ireland and not in any other country," says Breda Martin, tax consultant at UHY Farrelly Dawe White, Ireland. “The expenditure must be incurred on systematic, investigative or experimental activities in a field of science or technology. Revenue guidelines have stated that an advance in technology means an advance in the overall knowledge or capability in the relevant field and to a company’s own knowledge."
Mexico offers an immediately deductible 89% for machinery and equipment used directly for research on new products or developing technology in Mexico.
Meanwhile, the Netherlands has incentivised R&D investment with a 5% tax cut. Corporate income tax (CIT) law already enabled companies to benefit from a reduced CIT rate of 10% on profit from certain technological intangible assets (referred to as the 'patent box'), instead of the standard rate of up to 25.5%.
The reduced rate already applied to economic benefits from licensing patents, using the intangible assets in regular business operations, and selling the intangible assets.
But from 2010, the CIT rate has been further reduced to 5%; there are more opportunities to apply this lower rate; and the incentive is now known as the 'innovation box' because it applies to many more cases than before – even to assets for which no patent has been granted. Software also now falls within the scope of the 'innovation box', as do some trade/business secrets.
Signs that R&D investment may be protected despite severe economic cutbacks in western nations come from both the US and the UK.
According to data from the Bureau of Economic Analysis and the National Science Foundation in the US, R&D comprised 5% of the nation’s GDP growth from 1959 to 2004 and 7% between 1995 and 2004. The recession dried up much of this spending – R&D in the US has declined by 2.4% since December 2007, according to R&D Magazine. (Its commentators point to historical data showing that increases in R&D are consistently followed by increases in GDP.) But, since then, USD18.4 billion of the American Recovery and Reinvestment Act budget has been allocated to R&D spending and President Barack Obama has committed Congress to prioritising R&D investment.
In the UK, an innovation task force published its ‘Ingenious Britain’ report on how to make the UK the leading high-tech exporter in Europe. The report stimulated the incoming Conservatives, leading a coalition government, to confirm that R&D tax credits will be protected (whereas they had been under threat beneath a tide of public service cutbacks). The task force report proposes that R&D tax credits should be refocused on high-tech companies, small businesses and new start-ups, and that they should be boosted to 200% when public finances allow.
In tight economic times, companies are inevitably looking at ways
to maximise their return on R&D investment. Besides tax considerations, many other business (and political) factors must be evaluated to determine where your company's R&D investment should be located. However, more than ever before, tax departments are being asked to provide input in the R&D investment decision-making process, and tax incentives are playing an increasingly important role in where and how companies spend their R&D investment.
R&D incentives shown are just a selection of those offered by governments around the globe. For the latest details and local knowledge in your own jurisdiction and elsewhere please go to www.uhy.com to find your nearest UHY member firm, or contact the UHY executive office.