Commentary

As the economic downturn deepens, one of the most presssing concerns for many countries is that businesses will significantly reduce their research and development (R&D) expenditures to improve their bottom line. To provide added incentive for companies to maintain their investment in innovation, and to attract new R&D activity, many countries are enhancing their R&D tax credit provisions.

In all, 11 of the 24 countries we reviewed have taken some action with regard to the R&D credit. The most common approach has been to increase the rate of the credit. We have also seen the introduction of new or enhanced carryback provisions, enhanced refundability options and allowance of reserves for R&D expenditures to be deducted. In some cases, R&D benefits are being particularly enhanced for small- and medium-sized enterprises (SMEs).

Highlights

• Because many smaller busineses have been experiencing greater cash flow difficulties related to the economic downturn, some countries have been offering enhanced R&D credit provisions for small- and medium-sized enterprises (SMEs). For example, South Korea is increasing the R&D tax credit rate for SMEs only. Similarly, Australia’s proposed new R&D provisions would provide a 10% higher rate for SMEs.
• In Ireland, the rate of tax credit for incremental expenditure undertaken by a company on qualified R&D has been increased from 20% to 25%. With this increase, the total tax relief available for qualified R&D expenditures in Ireland can be as high as 37.5% (when the tax credit is combined with a tax deduction available for R&D spending). An allowance for capital expenditure on intangible assets is also planned.
• Some countries have added carryback provisions and refund elements to their R&D provisions. Ireland, for instance, is now allowing the carryback of excess credits to the previous year, with a refund of excess credit over a three-year period. France is offering a refund of R&D credits from 2005, 2006 and 2007 that have not been previously utilized. The R&D credit for 2008 is eligible for immediate refund if the credit exceeds tax due. The 2009 Australian budget announced adoption, from 1 July 2010, of a 40% tax credit for large companies’ R&D, with smaller companies to get cash refund of 45% for their R&D, with the proposed offset also available for foreign-owned R&D.
• Under Italy’s stimulus Decree, the R&D tax credit that was introduced in 2007 will be extended to Italian entities and branches engaging in R&D as contractors and sub-contractors of foreign principals, so long as they reside in an eligible country.
• In Japan, there is a proposal to increase the maximum creditable amount for certain R&D activity from 30% to 40% of the total tax due, along with an increase in the carryforward period from one year to three years.
• Aside from R&D tax credit enhancements, some countries have provided other incentives to encourage continued investment in R&D activities. For example, Belgium has increased retention (the portion of the salary withholding tax the employer does not have to transfer to the federal government) from 65% to 75% as of 1 January 2009. Singapore is providing a range of R&D grants and training reimbursement programs. China and Russia are allowing for greater deductions of qualified R&D expenditures for corporate income tax purposes. The Netherlands has temporarily increased the wage tax reduction for R&D staff in 2009 and 2010.

Next section: Indirect tax activity