6. R&D tax incentives

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In 2015, R&D tax incentives accounted for nearly half of total government support for business R&D in the OECD area, up from one-third in 2006.

R&D tax incentives have become a major tool for promoting business R&D in OECD and partner economies. In 2017, 30 OECD countries gave preferential tax treatment to business R&D expenditures, up from 16 OECD countries in 2000. Over the 2006-15 period, total government support for business R&D expenditure as a percentage of GDP increased in 25 out of 37 countries for which data are available, with the Russian Federation, Belgium and France providing the largest support as a percentage of GDP in 2015.

A comparison of public support provided in 2006 and 2015 shows an increase in the relative importance of tax incentives among 22 out of 33 countries for which data are available. Canada, Hungary and Portugal, starting from a high share of tax support, rebalanced their support mix by increasing their reliance on direct funding. Mexico abolished its previous tax relief scheme in 2009, but reintroduced the instrument in 2017.

Differences in the cost of R&D tax relief reflect not only applicable credit or allowance rates, but also eligibility rules and application decisions by firms. It is possible to calculate the notional level of tax support per additional unit of R&D to which firms with defined characteristics are in principle entitled. This level is largest for France, Portugal and Spain in the case of SMEs. Refunds and carry-forward provisions are sometimes used to promote R&D in firms that may not otherwise use their credits or allowances. 18 OECD countries offer refundable (payable) or equivalent incentives. Provisions such as these tend to be more generous for SMEs and young firms vis-à-vis large enterprises, as in the cases of Australia, Canada and France.

Definitions

Tax incentives for business R&D include allowances and credits, as well as other forms of advantageous tax treatment of business R&D expenditure. Estimates exclude income-based incentives such as patent boxes and incentives to taxpayers other than firms. The tax subsidy rate is calculated as 1 minus the B-index, a measure of the “before-tax income needed to break even on an additional unit of R&D outlay” (Warda, 2001). This measure of marginal tax support may differ from the average tax subsidy rate if ceilings and thresholds apply and some firms are prevented from claiming extra support. Each measure can be relevant for R&D investment decisions – the average at the extensive margin (whether to invest in a country), and the marginal at the intensive margin (how much to invest within a country).

Measurability

There are several ways to measure the value of R&D tax relief, as tax expenditures represent deviations from a benchmark tax system (OECD, 2010). These indicators adopt a common reference framework based on full deductibility of current R&D and a country’s treatment of capital investments. Estimates are typically based on tax records and calculated in terms of initial revenue loss with no or minimal adjustments for behaviour effects. The latest edition of the Frascati Manual (OECD, 2015) summarises the guidance on reporting data on tax relief for R&D.

To provide a more accurate representation of different scenarios, B-indices are calculated for “representative” firms according to whether they can claim tax benefits against their tax liability in the reporting period. When credits or allowances are fully refundable, the B-index of a firm in such a position is identical to the profit scenario. Carry-forwards are modelled as discounted options to claim incentives in the future. Adjustments for ceilings on claimable R&D or tax relief are modelled whenever possible (see chapter notes).