While the world's major economies continue to recover or stagnate, businesses continue to invest judiciously in research and development (R&D). There is a common view among nations that it is essential to provide business enterprises with tax incentives to perform R&D activities within a nation's borders, and that these incentives are an important driver for a nation's economic future. Governments in both large and small nations believe R&D is a key factor in spurring economic growth. They hope improved incentives will attract quality jobs and higher R&D investment into their country.
Alvarez & Marsal Taxand's most recent version of the is an essential reference for tax executives, principally:
- When called upon to quickly inform their colleagues of the impact of locating a research activity in a particular country;
- When evaluating the movement of research activities to other jurisdictions possibly having more lucrative R&D incentives; or
- When determining jurisdictions in which to keep research activities in the case of corporate contraction.
It is our belief that R&D incentive regimes may play an important ---- perhaps even a pivotal ---- role in the final determination to locate, expand or close an R&D facility. Building upon A&M's 2009 Global Guide, the 2011-2012 guide also includes Indonesia, Mauritius, Netherlands, Pakistan, Romania and Venezuela in the international tax incentives analysis, as well as information on American state R&D incentives.
Types of Incentives Offered:
There are three primary types of inducements nations provide to encourage R&D activities: (1) tax credits, (2) deductions and (3) a broad category of additional incentives.
R&D Tax Credits
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.
R&D Tax Deductions
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, thus creating an enhanced benefit.
Additional Incentives Offered
Many countries offer additional tailored incentives other than a tax credit or expense deduction. These incentives are offered in numerous forms. Examples are varied and can include allowances, grants, import duty exemptions, industrial/economic zones, and property or sales tax exemptions.
Global Guide to R&D Tax Incentives
Tax departments are often asked to provide input on a variety of corporate decisions, including whether to open a new facility, close an existing facility, purchase a company or sell a company, or where to locate an expansion. An important consideration in such decisions is the effect the tax incentives offered in the various jurisdictions being considered may have on your company. Alvarez & Marsal Taxand's updated version of the Global Guide to R&D Tax Incentives assists tax departments in making these decisions. The guide focuses on the income tax incentives offered in various jurisdictions. It can be downloaded .
Below is a short description of the incentives offered in each country in the 2011-2012 publication:
United States — In late 2010, the House and Senate again voted overwhelmingly for a two-year extension of the R&D tax credit for the 2010 and 2011 tax years. The United States offers both a tax credit and tax deduction for R&D expenditures. While the tax deduction tends to be fairly straightforward, companies face significant complexity when it comes to calculating and documenting the credit. In addition to considering several calculation alternatives, taxpayers often spar with the Internal Revenue Service over whether or not activities meet very subjective qualification tests. Many states also offer income tax incentives for R&D activities taking place within their jurisdiction. Furthermore, numerous states and localities offer additional types of incentives for R&D activity (e.g., sales tax exemptions, property tax exemptions, etc.). A table of state incentives is summarized in the latest guide, as are a number of the most recent R&D issue court decisions.
United Kingdom — The U.K. offers R&D incentives and Vaccine Research Relief to companies performing qualifying activities. Because of the importance of these credits, the U.K. has separate specialist units to review claims. Other credits and deductions are also offered to companies. Small and medium-sized enterprises are offered larger incentives to assist in their growth.
Argentina — Argentina continues to expand its tax regulations to encourage R&D efforts across industries and companies. Tax deductions are offered on costs associated with attaining intangible property. Tax credits are offered to all companies performing R&D, with larger credits available to small and mid-sized companies. Argentina has a strong history of R&D activities in the archetypical, biochemical and medical fields, but has also recently made significant strides in software, nanotechnology and biotechnology.
Austria — The Austrian government formed the Austrian Research Promotion Agency to promote the advancement of R&D within the country. Tax deductions are offered in a variety of forms of relief for qualifying R&D expenditures. As of January 2011, the research premium granted for R&D performed by subcontractors on request or for the purpose of a company's own R&D activities has been raised from 8 to 10 percent.
Belgium — Belgium allows companies to take a deduction on expenses related to new patents. The country also offers companies the opportunity to convert certain deductions into tax credits. The government continues to work to provide additional incentives for particular science and research fields. Since January 1, 2009, employers in the science and research fields have been exempt from paying 75 percent of the withholding tax on remuneration paid to researchers.
Brazil — Over the last few years, the Brazilian government has introduced not only incentives for technical innovation but also a series of tax incentives to encourage R&D. Brazil offers tax breaks specifically to organizations in the information technology industry to encourage both investment and development within the software sector.
Canada — The Canada Revenue Agency and the Department of Finance administer and govern a scientific research and experimental development credit. The credit, an incentive offered to Canadian taxpayers each year, continues to be one of Canada's largest corporate incentives. The country also offers immediate expensing of 100 percent of allowable expenditures. Several provinces offer additional tax incentives.
Chile — The Chilean government recently expanded the tax incentives offered for R&D. The government offers a tax deduction that can be taken in full in the year the expenditures are spent. Additionally, a tax credit is offered to specific private companies, universities and research centers.
China — China does not currently offer an R&D credit as an incentive. However, enterprises engaged in developing new products, technologies or techniques can deduct both R&D expenses not specifically allocated to the creation of an intangible asset and an additional 50 percent of these expenses as a current expense. If R&D expenditures have been allocated to a particular intangible asset, its cost can be amortized from a 150 percent basis of these expenses (the amortization period may not be shorter than 10 years).
Colombia — Colombia has some of Latin America's highest corporate tax rates. To incentivize companies to continue to do business within its country, the government allows companies to deduct certain business expenses (including R&D).
Cyprus — While Cyprus does not offer specific R&D incentives, it does boast a low 10 percent tax rate and offers several investment incentives.
Denmark — Denmark allows companies to deduct qualified expenditures in either the year in which they occur or over a four-year period. Denmark allows (in specific circumstances) expenditures that occurred prior to the official start of a business to be deducted.
Finland — Finland ranks second in the Organisation for Economic Co-operation and Development in terms of R&D as a percentage of gross domestic product. This is largely due to the deduction of expenses (including R&D expenses) related to income-producing products. The country also allows companies a deduction for purchasing or constructing buildings and other tangible property related to R&D.
France — France allows a credit for R&D expenses (which include manpower and equipment dedicated to in-house R&D, subcontracted research activities, technological surveillance, patent filing and patent protection). In certain situations, France's research credit can become refundable. France offers additional support to companies benefitting from the R&D tax credit for the first time by providing an introductory bonus. This opportunity is a one-time 40 percent tax credit on qualifying expenses for the first business year and a 35 percent tax credit for the second year.
Germany — The German government works to promote R&D within its country through measures such as allowing companies performing R&D in Germany to fully deduct all R&D expenditures (treated as business expenses) from their current taxable income, as well as the availability of significant grants.
Greece — Greece offers deductions to counteract a high tax rate and to incentivize companies. R&D expenses are fully deductible from taxable income within the year they are incurred, or instead, if they relate to fixed equipment, in equal installments over three years. This is subject to general deduction prerequisites defined in the law. Moreover, an additional tax deduction of amounts equal to 50 percent of R&D expenses incurred up to December 31, 2014, is granted under certain conditions.
Hong Kong — Hong Kong allows companies to deduct expenses related to R&D in the year in which they are incurred.
Hungary — In Hungary, the Act on Corporate Income Tax and the Innovation Fund for Research and Technology incentivize R&D activities.
India — Tax incentives for R&D in India are currently in the form of either a weighted/accelerated deduction for expenses or an exemption from tax liability in certain cases.
Indonesia — The Indonesian government offers companies conducting R&D additional deductions, accelerated depreciation, extended loss carryovers and a tax exemption or relief on import duty, VAT and Article 22 income tax.
Ireland — Companies carrying on an Irish trade or business may take a corporate tax deduction for non-capital R&D expenditures incurred wholly and exclusively for the purposes of their trade or business. Ireland also offers a tax credit of between 20 and 25 percent (depending on the year in which expenditures were incurred) for companies performing R&D within Irish borders.
Israel — Expenses related to an R&D project approved by the Israeli government can be deducted in whole for that tax year, up to a specified ceiling (which is usually 40 percent). Qualifying projects must have a goal of making advancements in industry, agriculture, transportation or energy.
Italy — Italy has a variety of incentives to encourage R&D activities. Current R&D expenses are deductible in full in the year incurred or amortized over five years using the straight-line method.
Japan — Japan offers a tax credit of up to 30 percent for qualifying expenditures. Additionally, small or mid-sized companies can choose from a host of additional credit options.
Luxembourg — The Luxembourg government recently made an expansive push for R&D. Luxembourg offers subsidies and grants for qualified R&D expenditures. Small and mid-sized corporations are able to take additional deductions. Additionally, regional deductions are offered across the country to promote R&D in particular areas.
Malaysia — Malaysia offers direct incentives in the form of income tax relief and indirect incentives in the form of sales tax and duty exemptions. R&D is mostly incentivized through the Promotion of Investments Act. Additionally, the government offers tax allowances to qualified companies performing qualified activities.
Malta — The Malta government recently enacted legislation to govern industrial development. This legislation incentivizes companies engaged in R&D by granting a deduction equal to 150 percent of qualified expenses. Additionally, the government offers investment tax credits.
Mauritius — Mauritius has a flat 15 percent tax rate on chargeable income. It has done away with a number of exemptions and incentives.
Mexico — Recent amendments to the Mexican Income Tax Law, which came into effect on January 1, 2010, eliminated the income tax credit equal to 30 percent of R&D spending and technology investments. Currently, Mexico allows R&D expenditures to be deducted as incurred.
Netherlands — In the Netherlands, if a company earns profits from qualifying new technological know-how (a technology intangible asset), it may elect to use the innovation box incentive. This means that rather than taxing the full amount of such profits at the general corporate income tax rate of 25 percent, only about one-fifth of such profits will be taxed at that rate.
Norway — The Norwegian government offers tax deductions of 20 percent to small and mid-sized companies. It also offers smaller deductions (with a cap) to larger companies performing R&D. Additionally, Norway offers grants for companies focusing their efforts in specific economic sectors.
Pakistan — Pakistan encourages R&D by allowing statutory deductions from gross receipts. This is in addition to many other incentives provided for accelerated depreciation of business assets in specific areas and total exemptions in certain regions.
Panama — Innovative companies in the International Techno Park of Panama (TIP) are exonerated of the Transfers of Corporal Goods, Furniture and Services Taxes (ITBMS) on machineries, equipment, vehicles, appliances and other goods acquired and necessary for the development of companies accepted in the Techno Park at the City of Knowledge. Further, they are exonerated of any tax, rate or duties.
Philippines — The Philippines actively promotes the development and use of renewable energy sources by offering tax incentives. The government allows companies to deduct qualified R&D expenses either as incurred or amortized over a 60-month period. Additionally, the country's Board of Investments grants further tax holidays for specific qualified projects.
Poland — Poland allows companies to deduct 50 percent of qualifying expenditures related to new technology. This incentive is in addition to the option to deduct depreciation on the initial value of new technologies. Small and medium-sized enterprises planning new investments in Poland may obtain a subsidy-granting technological credit, with the possibility of obtaining a technological premium (up to 70 percent of eligible costs).
Portugal — Portugal offers an investment deduction for qualifying R&D expenses. In addition to the deduction, the government offers several incentive programs to foster innovation. These incentives are available through programs such as the Incentive Scheme for Business Modernization, which provides subsidized loans and grants.
Puerto Rico — The Economic Incentives for the Development of Puerto Rico Act (the EIA), effective July 1, 2008, provides grantees a 50 percent tax credit on R&D expenditures (which include both operating and capitalized expenditures). The use of this credit is subject to certain limitations.
Romania — Romania offers additional tax deductions for R&D expenditures and accelerated depreciation on equipment used in R&D.
Russia — R&D expenditures on new or improved products are deductible. Additionally, a company conducting scientific research or experimental development work, re-equipping its manufacturing, or engaging in implementation or innovation activities can be granted an investment tax credit.
Singapore — During 2008, the government introduced an R&D incentive package offered to companies. The package includes liberalized R&D tax deductions, a new R&D tax allowance scheme and additional R&D incentives for start-up enterprises. In Budget 2010, the liberalization of the R&D deduction was extended to 2015 as part of the Productivity and Innovation Credit (PIC) incentive.
South Korea — South Korea offers deductions for R&D expenditures in the form of depreciation for acquisitions of R&D equipment or facilities. The amount expended for non-capital R&D expenses is also deductible. Additionally, the government recently made its R&D tax credit permanent.
Spain — Spanish corporate income tax law allows the application of unrestricted amortization to assets and expenses related to R&D activities. Additionally, Spain offers an R&D tax credit on certain expenses defined as R&D activities. Spanish taxation distinguishes between R&D activities and technological innovation, but it provides incentives for both.
Sweden — Sweden has consistently ranked high in R&D investment. Business-related R&D expenditures are deductible in Sweden, although the pace at which the deductions occur may vary depending on the nature of the activities.
Switzerland — Switzerland allows the deduction of activities relating to R&D. Generally, the Swiss government distinguishes between a project's research phase and development phase. The expenditures during the research phase are tax deductible at the time that the costs are incurred, whereas the costs for development may be capitalized on the balance sheet if certain conditions are met.
Taiwan — The Taiwanese government has promulgated the Statute for Industrial Innovation (SII), replacing former versions of R&D tax incentives. Consequently, under the SII, the R&D credit is the only tax incentive and is up to 15 percent of the R&D investment against a company's income tax liability. Taiwan's corporate income tax rate has recently been reduced.
Thailand — Thailand offers several R&D tax incentives and programs to foster innovation within the country. Two options are available for companies performing R&D: a 200 percent deduction for the cost of hiring qualified researchers working on R&D projects and a special initial depreciation on the date of acquisition for machinery used in R&D projects.
Turkey — Turkey offers a 100 percent deduction for qualified R&D as well as specific subsidies and allowances.
Venezuela — Venezuela offers a special 10 percent investment tax credit on the value of new investments in fixed assets (excluding land) made by legal entities that obtain income from industrial and agro-industrial activities (with a few exceptions). Investments in technological R&D can also be used to exonerate income tax on agricultural, forestry, cattle-breeding, poultry-breeding, fishery, aquaculture and pisciculture activities.
Alvarez & Marsal Taxand Says:
Even in a stagnant economy, research and development remains a significant portion of a company's expenditures. Still, there is a great deal of pressure for corporate decision-makers to do more with less. One way to maximize these investments is for tax departments to compare jurisdictions to determine which state or nation's incentives align most advantageously with business factors (e.g., available technical employees). In the end, tax reasons alone are unlikely to be the only factor. However, incentives may tip the balance where locations are otherwise equivalent.
As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.