A world tour of R&D tax incentives

2015-06-22-01Research and Development (R&D) is one of the key ingredients in innovation and in improving the outlook for both companies and for the economy in general.  Many countries understand this, and thus their governments have implemented an assortment of incentives to encourage R&D. These include tax credits and subsidies, among other approaches. Given our interests at CREATECH in both R&D and commercialization of its results, often though entrepreneurship and internationalization, we asked ourselves: How widespread are these incentives? Do they coincide with other national innovation rankings? And would they drive a startup’s decision to locate in a particular country?

R&D tax incentives establish special tax treatment for R&D costs, effectively reducing the corporate taxes that would have otherwise been paid on the firms profits. For the Organization for Economic Cooperation and Development (OECD) the difference between direct subsidies and tax incentives is that the latter “allow firms to decide the nature and orientation of their R&D activities, on the assumption that the business sector is best placed to identify research areas that lead to business outcomes. R&D tax incentives are market friendly instruments that are by nature more neutral than direct support instruments.”

According to OECD data,27 of the 34 OECD member countries offer tax incentives for R&D: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Turkey United Kingdom and the United States. Also some non-OECD countries have tax incentives: Brazil, China, India, Russian Federation, Singapore and South Africa.

The publication “OECD Science, Technology and Industry Scoreboard 2013” shows us how R&D tax incentives compare in different countries. In the following chart of comparing R&D tax incentives in different countries, dark blue represents tax incentives for small profitable firms and light blue represents tax incentives for large profitable firms.

Source: OECD R&D Tax Incentives Indicators; based on the 2013 OECD-NESTI data collection on tax incentives support for R&D expenditures. http://www.oecd.org/sti/rd-tax-stats.htm#design

For small profitable firms, the top 10 national R&D tax incentives are offered by these countries (the percentage is the value of the tax incentive):

  • Portugal: 62%.
  • France: 51%
  • Spain: 38%
  • Chile: 35%
  • Netherlands: 34%
  • Canada: 33%
  • Hungary: 33%
  • Ireland: 29%
  • Finland: 28%
  • United Kingdom: 28%

For large profitable firms, the top 10 national R&D tax incentives are offered by:

  • Portugal: 49%
  • Spain: 38%
  • Chile: 35%
  • Hungary: 33%
  • Ireland: 29%
  • France: 28%
  • Finland: 28%
  • Brazil: 26%
  • Norway: 22%
  • South Africa: 22%

In these top 10 lists, we can see that some countries incentives favor small profitable firms (Portugal and France).  And 7 countries appear in both lists: Portugal, Spain, Chile, Hungary, Ireland, France and Finland*.

In spite of these national R&D tax incentives, the “2014 Global R&D Funding Forecast” tells us that Finland is the only country that makes the top 10 lists for both R&D tax incentives lists and R&D as a percentage of GDP.  Similarly, in the “Bloomberg Innovation Index 2015” only three countries coincide with the R&D tax incentive leaders: Finland, France and United Kingdom.

Some OECD countries don’t offer tax benefits for R&D expenditures, but prefer other methods to encourage R&D activities.  Germany and Mexico are examples.  Germany offers non-repayable cash grants which cover on average 50% of the costs of eligible projects. Germany has also loans for R&D activities, for example the ERP Innovation Program which offers 100% financing for projects which cost up to USD $5.3 thousand. Mexico eliminated its R&D tax incentives in the 2010 Tax Reform, but now provides cash grants for R&D through three programs: INNOVAP PYME, PROINNOVA and INNOVATEC.

From the company perspective: Will the presence or absence of an R&D tax incentive figure into your decision of where to locate your start-up company? We think not, or that it won’t be a primary driver (especially if it won’t be a “profitable firm” for a few years).  But for “large profitable firms” that might be planning to do R&D in multiple countries, evaluating the R&D tax incentives in each jurisdiction would make sense as part of the overall evaluation and optimization of the cost of doing business in each locale.

And from a national tax policy perspective: while the presence of a market-leading R&D tax incentive doesn’t seem to be a recipe for instant leadership in the national innovation rankings, clearly it is an ingredient in the success of some of the national innovation leaders.


*For further reading, Chapter 5 “STI Policy Profiles: Innovations in firms” in the publication “OECD Science, Technology and Industry Outlook 2014”, has a general explanation of the characteristics of different tax incentives for R&D and innovation in each country.

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