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Why governments want R&D to drive growth

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In times of austerity, governments have various fiscal options available to them to target economic growth. Despite a range of options to choose from, there seems to be one particular measure that is in vogue at the moment: the R&D tax credit.

Governments around the world are increasingly looking to attract and incentivise innovation, above other measures, to ease their country’s road to recovery.

In Finland, companies hiring new personnel to engage in R&D activities will get a tax break to help pay for such hires. The incentive means that if the extra payroll costs are below a certain threshold, the company can get tax relief for up to half of them. The Finnish government had been consulting since 2009 as to whether growth could be boosted through tax measures, and concluded that the R&D incentive was one such growth-generating measure worth taking forward.

There has been a declining trend of investment in R&D in Finland, so the government is hoping to stimulate the area and create new jobs. Early government calculations suggest that for every euro of tax revenue lost due to the measure, two euro’s worth of R&D activity will be generated.

Employment, and retention of skilled employees, is clearly a focus for the Finnish government.

In Ireland, Finance Bill 2012 was used to try and further improve the country’s attractiveness as a centre for investing in R&D activities, with companies now able to use their R&D tax credit to reward key employees. The Irish government is hoping this incentive will attract both R&D activities, and the key individuals driving that activity, to Ireland.

The Finance Bill also increased the threshold for R&D outsourcing, another welcome incentive expanding the scope of R&D activity in Ireland. The combination of these changes ensures that businesses of all sizes will be encouraged to invest more in R&D related activity.

George Osborne, UK Chancellor of the Exchequer, is also getting in on the action, as the country is introducing a new above-the-line R&D tax credit payable to companies with losses, which will be set against the cost of R&D rather than lowering the tax liability. Again, the buzzwords coming from government centred on “higher growth” and cultivating an “internationally competitive environment for all companies to innovate”.

Businesses had been lobbying for the changes, particularly those in the automotive sector, so from a popularity point of view, too, the government realised the advantages of implementing the credit.

Each of these examples highlights the emphasis being placed on R&D incentives in the present climate of prioritising growth. Meanwhile in the US, with Union Carbide battling the IRS in the US and trying to retroactively apply R&D credits, the result in America could be that the scope of applicability for &D tax credits is significantly widened.

But the US authorities should not be concerned. If the actions of Finland, Ireland, the UK and many others are anything to go by, then the US should see a boost in economic growth if Union Carbide is victorious.

FURTHER READING:

Australia plans to slash R&D incentives

Ireland improves its R&D tax offering

Finland seeks growth through R&D payroll incentive

Lobbying pays off as UK gets new R&D credit

Union Carbide dispute could widen scope of US R&D tax credits

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