Brussels, 12 Jul 2006
SUMMARY OF EUROCHAMBRES' POSITION
- We believe that the provision of guidelines by the Commission on a harmonised framework on R&D tax incentives can be beneficial in providing a common framework for stimulating private sector R&D efforts. It will help in developing a common understanding and allow a congruent and more effective use of state aid.
Tax incentives for R&D play an important role in increasing private sector R&D spending as envisaged in the Lisbon and Barcelona goals (3 % of GNP in 2010, 2/3 of new investment from the private sector)1:
- They push R&D efforts of companies beyond the limits imposed by internal and short-term financing ability or the ability to absorb the financial risk associated with innovation.
- They impact companies of all sizes, not just SMEs, because risk and the positive external spill-overs of R&D come into effect regardless of company size.
Tax incentives for R&D complement direct aid for R&D and innovation. They typically have a low administrative burden and establish an incentive to venture into research and innovation particularly in fields where no direct aid is available, where no special support programs apply because a field of technology or a scientific discipline is not (yet) seen as a promising area for innovation investment by public policy makers or R&D funding agencies.
We believe that the provision of guidelines by the Commission on a harmonised framework on R&D tax incentives can be beneficial. It will help in developing a common understanding2 and allow a more effective use of state aid.
Good practice criteria
Good practices will consider the following criteria:
- low administrative cost (e.g. as an element reducing corporate tax or the cost of research personnel)
- reducing the tax liability for profitable companies in proportion to their expenditure for R&D and innovation.
- Offering a "negative tax", i.e. a cash premium, to companies without sufficient profits to benefit from a tax reduction (as is often the case with start-ups and highly innovative firms with long lead times to market entry or achieving a revenue stream from innovation). The cash value of such premiums should correspond to the tax rebate granted for profitable companies.
- providing an extra bonus if company R&D expenditure has particularly high and steady growth rates (e.g. an average increase of +10% over 3 years)
- providing tax incentive for R&D that is contracted out and performed by third parties but financed by companies. The partner who pays and bears the economic risk of innovation should benefit from tax incentives.
- Appropriate evaluation methods for assessing the effectiveness of the R&D tax incentives in particular with respect to shorter time to market, overall volume of R&D expenditure, increase in R&D personnel, improvement of R&D infrastructure, improvement of science- industry cooperation and behavioural additionality towards more systematic and continuous R&D and innovation efforts at a higher level..
Bad practice criteria
Negative effects have been found with:
- caps on the eligibility for tax incentives for R&D. Since the R&D intensity of sectors and markets varies greatly such caps are hugely unfair to sectors where R&D depends on high capital spending, costly R&D infrastructure, high manpower requirements, long investment cycles (i.e. process technologies) and long development times (e.g. biotechnology for new medicines or new development of chemical processes in refining, steel making, polymer production, vs. new software development).
- Uncertain definitions of R&D and innovation expenditure. Under such conditions the risk of opportunistic behaviour and abuse is higher while the leverage effect of tax incentives is diminished. Clear definitions, such as those based on the OECD Frascati Manual help to reduce windfall gains. While additionality is a prime motive for establishing indirect tax incentives for R&D it is hard to isolate in an overall R&D effort that is the basis for them.
Incentives to encourage the uptake of research personnel via reduced social security are very difficult to establish in countries where social security systems are separate from the state and tax system.
It is important to link the outcome of the present consultation with the efforts made on state aid for innovation. R&D investment aims at stimulating innovation which in turn stimulates growth and jobs. R&D tax incentive should definitely encourage firms to innovate without harming transparent and effective state aid control. The importance of tax incentives as a complement to focussed direct aid in technology areas with little profile among public policy makers cannot be overestimated.
Furthermore, given the member states diverging tax systems and budgetary priorities a common frame of reference for indirect tax incentives for R&D can serve to increase the over-all effectiveness of scarce public funds. Alternatives must be envisaged. Project orientated R&D funding following a bottom-up principle, as opposed or complementary to institutional funding, possibly coordinated across member states seem a valuable alternative. . This instrument has to be complemented by other unbureaucratic means of R&D funding. The so called "research bonus/research award" proposed in Germany as an incentive for universities and research organisations to collaborate with the business sector may serve as an example. Under this scheme universities and research organisations get this bonus if they work together with SMEs). Alternative, Dissenting Position
While this position is supported by the majority of EUROCHAMBRES members, it should be noted that the DIHK, the Association of German Chambers of Commerce and Industry, is strictly against R&D tax incentives, believing they are not adequate in fostering R&D. Instead, DIHK calls for low tax rates together with an (allowance free) broad tax base.
For further information about the position paper:
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