Tax incentives for R&D: the Science|Business guide

Searching for the best tax incentives in European R&D? Then look no further than the Science|Business guide to this popular - though by no means universal - stimulant.

By Duncan Freeman

Searching for the best tax incentives in European R&D? Then look no further than the Science|Business guide to this popular – though by no means universal – stimulant.

Introduction | European Resources | Resources by Country

Introduction

The generally accepted view in advanced economies is that R&D is good for economic growth. That principle is enshrined in efforts under the European Union’s Lisbon Agenda to increase R&D spending as a percentage of GDP to 3 per cent by 2010. Many governments in Europe have long had policies intended to boost R&D, but the Lisbon Agenda has provided an impulse to adopt new measures. One of the most common methods used, although by no means universal, is tax incentives for R&D.

Whether these efforts will push Europe up to the 3 per cent target remains to be seen. The current trends are not encouraging, but the economic evidence suggests that tax incentives are effective – though the exact increase in R&D that results is often hard to measure. And taxation is only one factor to be taken into account in making investment decisions. Governments also use other policy instruments, such grants and loans to support R&D, and factors such as procurement policies and education are also important elements in the support of innovation.

According to the Organisation for Economic Co-operation and Development (OECD), 18 of its 30 member countries now have tax incentives for R&D, compared with 12 out of 27 in 1996. What is more, the level of tax incentives is on the rise, with Spain and Portugal offering the highest level of tax subsidy in Europe per dollar of R&D spending.

That incentives are not the only factor in building a competitive, R&D focused economy is confirmed by the OECD scorecard on the level of tax subsidies for R&D. In the OECD index of the rate of tax subsidies, Spain and Portugal rank first and third. Norway is fourth, and Denmark fifth. France and the UK rank in the middle of the table, while Finland and Sweden, two Scandinavian economies widely considered highly competitive, are close to the bottom. Germany, which is one of the rare major economies to offer no specific tax incentives for R&D, is in next to last place, above Italy.

Most European governments offer some form of tax incentive for R&D spending, but the details of how they operate vary enormously. There two main types of incentive: volume and incremental. In the first case, tax relief applies in a straightforward way based on the amount of spending on R&D. In the second, it will apply only to an increase in spending on R&D. Volume incentives are considered to be simpler and more effective, at least from the point of view of the company, since an incremental incentive will not apply if spending on R&D by a company falls or remains the same. The UK, for instance, has a volume incentive, while in France it is incremental.

Other factors to be taken into account include the precise definition of what constitutes an R&D activity, and the type of expenses to which tax relief applies. Two common forms of relief are enhanced deductions for expenses or depreciation allowances for capital spending, although the Netherlands has a deduction against the tax liability for employees engaged in R&D. Incentives can also apply to different types of company – in Italy, for example, only small and medium companies are eligible.

European Resources

The Innovation Policy Development unit of the Enterprise & Industry Directorate General at the European Commission provides updates on policy measures intended to encourage innovation in every EU member state, including developments related to tax incentives for R&D. However, it does not provide an overview of the current tax situation for countries offering incentives.

An OECD report provides an overview of the economic role of R&D tax incentives. It also produces a Science and Technology Industry Scorecard with comparisons of the level of R&D tax subsidies.

The EU will be adopting guidance in 2006, which will be intended to coordinate R&D tax incentives across all member states.

Resources by country

Overviews of incentives for R&D or the tax system as a whole can often be found in English on the websites of the official investment promotion agencies of the countries concerned. The following listing also includes links to tax authorities, which also provide information on their tax systems, although in some cases they do not include data in English.

Austria

Austrian Business Agency

Ministry of Finance

Belgium

Ministry of Finance

Czech Republic

Czech Invest

Denmark

Central Customs and Tax Administration

Estonia

Ministry of Finance

Finland