R D Tax Credits Challenges Jacek Warda Mutual Learning

R&D Tax Credits’ Challenges Jacek Warda Mutual Learning Exercise – ERAC Workshop Directorate General for Research and Innovation Brussels June 30, 2015 1 JPW Innovation Assocaites Inc.

The context: direct vs. indirect business funding of R&D (2012 or latest year) 0. 45 % Direct funding (grants, loans, procurement) as a % of GDP. . . 0. 40 Indirect funding (R&D tax incentives) 0. 35 0. 30 0. 25 0. 20 0. 15 0. 10 0. 05 e ec Sl o va k G re R ep ub lic la nd Po ur g ly Lu xe m bo Ita an d Fi nl an y ar k er m G en m to ni a n Es l ed e ga Sw tu ay Po r or w ai n N D d te ni Sp ng do m la nd Ki ic ub l Ire U C ze ch R ep ga ry s un H he rla nd ria st N et Au um gi ce Be l an Fr Sl o ve ni a 0. 00 Source: Science, Technology and Industry Outlook 2014, OECD. Paris, 2 JPW Innovation Assocaites Inc.

Why this instrument? § Widely used in the European Union (and overseas) § Rich accumulated experience § Good uptake, generally § Asymmetric learning process § incumbents vs. beginners 3 JPW Innovation Assocaites Inc.

Discussion § Identification of policy challenges § How MS have overcome challenges § Challenges that could benefit from a potential MLE project § Are there groups of countries interested in potential MLE projects § How to take the process to next stage 4 JPW Innovation Assocaites Inc.

Challenges for design Definition 1 § What is R&D? § Frascati definition – scientific advance, systematic investigation and uncertainty of outcome § Broader definitions § Impacts: uptake, supporting documentation. easiness of filling the claim § Tendency to expand towards innovation expenses beyond R&D § France : Innovation Tax Credit within the research tax credit, starting in 2013 § Other examples? 5 JPW Innovation Assocaites Inc.

Challenges for design Definition 2 § What expenses? § Expense base can vary § All (capital and current) or some items (e. g. labour) only § Impact on generosity § Reflects the definition adopted 6 JPW Innovation Assocaites Inc.

Challenges for design Mechanism 1 § What taxes? § Corporate income tax credit § Generally more complex in design and implementation § Payroll tax-based credits § § 7 Anti-cyclic Less costly to manage Instant refund Smaller base - less generous so rates typically are high JPW Innovation Assocaites Inc.

Challenges for design Mechanism 2 § What base: volume or incremental? § Volume – broad scope, favours catching up on innovation, risk of deadweight losses § Incremental – targeted at R&D-growing companies, prone to strategizing by firms, may have complex formula § What instrument? § Tax credit – deduction from tax payable § Independent of taxable profits § Super-allowance – deduction from taxable profits § Need to adjust the rate of super-allowance with changes to corporate income tax (i. e. , to keep benefit constant) § Related instruments like reduced rates for social contributions. France Jeune entreprise innovante / JEI 8 JPW Innovation Assocaites Inc.

Challenges for design Policy issues 1 § What to target? § Size (SMEs) § Financial constraints for SMEs (market failure) § Danger of subsidizing not growing incumbent firms, particularly if incentives vary with thresholds § Knowledge spillovers hard to justify § Age § Specific to young innovative companies (YIC) § Parameters to define: eligible age, length of enhanced support § Public-private collaboration § Profit-neutral as no market rivalry with science organizations § Help leverage knowledge and resources § Other areas (technology, market, legal status etc. ) 9 JPW Innovation Assocaites Inc.

Challenges for design Policy issues 2 § What rates? § High tax credit rates don’t mean high generosity § Base and mechanism are important § Caps as ‘taming’ and targeting instrument § What about unused credits? § § 10 Inability to fully use credits reduces their value Cash refunds – for corporate-income tax credits Automatic refunds for payroll-based tax credits Otherwise carry-forwards from one-year to infinite JPW Innovation Assocaites Inc.

Challenges for implementation 1 § Stability § Permanent = predictable, good for R&D planning § Temporary (periodically renewed) § Experimental – one-time only pending assessment § Monitoring: hands-on or hands-off § Both come at a cost § Hands-on – high burden of administration; requires client oriented programs to ease the initial burden; costly § Hands-off – works more as an incentive; less costly to business and government; may involve a free-riding cost (fiscal accountability issue) 11 JPW Innovation Assocaites Inc.

Challenges for implementation 2 § Promotion, outreach to business community § New credit instruments require working with business to provide advertising and initial assistance § Critical for business buy-in and uptake § Governance § Country dependent § Need to process claims on (a) scientific/technical merit and than (b) financial/fiscal soundness § Models include tax agency (does both a and b) or mix of science-based agency (doing a) and tax agency (doing b) § France: cooperation between the ministry of finance and the ministry for research § Models where science-based organization does scientific eligibility are preferred 12 JPW Innovation Assocaites Inc.

Challenges for evaluation § Planning for evaluation § Proactive vs. reactive § Data collection § Anticipate what data you will need to collect § Timely and cost-effective evaluation § Meta-analysis § Benefit-cost analysis § Expert knowledge and independence § Governance and publication 13 JPW Innovation Assocaites Inc.

Questions § In designing, implementing and/or evaluating your policy instrument, what was some of the most pressing challenges you were faced with, and how did you overcome them? § What are the persistent challenges that you continue to face? § Which other countries may face similar challenges? 14 JPW Innovation Assocaites Inc.

Questions: challenges in France § Challenges in implementation: § organisation of control. Interested to know about other countries with respect to a priori or a posteriori controls and whethere are specialized fiscal teams. § Role of intermediaries/fiscal consultancies in the process § Challenges in impact evaluation: § policy mix and interactions with other instruments § Meta-analysis § Impact on R&D and impact on innovation (patents…) § Back to design § What can we say about the combination of fiscal incentives on input (R&D) and output (patents)? In other words, tax credit and patent box ? 15 JPW Innovation Assocaites Inc.

Suggestions from France on impact evaluation Discussions/workshops based on « A study on R&D tax incentives » Taxation papers, European Commission 2014 1. Scoring method 2. Consideration of different fiscal instruments together 3. Meta analysis of tax credits 16 JPW Innovation Assocaites Inc.