1. TAX Support for R&D and Innovation – OECD DATA AND RESEARCH EVIDENCE
Alistair Nolan
Science and Technology Policy Division
Directorate for Science, Technology and Innovation
OECD

2. Available resources Thematic reports:
OECD estimates of government tax relief for R&D in business,
Design of tax relief for R&D and implied tax subsidy rates, 2016
OECD R&D tax incentive compendium
Country profiles released on March 23, 2017.
STI Policy paper: R&D Tax Incentives: Evidence on design, incidence and impacts
Tax working paper: Fiscal incentives for R&D and innovation in a diverse world
Reports and profiles to be updated annually, as part of EU-sponsored project

3. Why measure R&D tax incentives?
70% of OECD R&D takes place in business sector
Public support for business R&D can take the form of:
Knowledge generated in publicly-funded research base, used by firms: universities, government labs, ...
Financial support for firms,
R&D tax subsidies
Some forms of support other than subsidy
(e.g. procurement)
Tax incentives take a number of different forms:
• Exemptions: income or expenditures that are excluded from the tax base.
• Allowances: extra amounts over current business expenses deducted from gross income to arrive at taxable income.
• Credits: amounts deducted from the tax liability.
• Tax deferrals: a relief in the form of a delay in payment of a tax
(e.g. accelerated depreciation allowance, current deduction).
• Rate reliefs: a reduced rate of corporate income tax applied to certain taxpayers or activities.
Rationales for subsidy

4. Tax support for R&D has become more important, especially in some major economies
Tax support as a percentage of total (direct and tax) government support for business R&D, %
Reasons for this increase ?
Source: OECD, R&D Tax Incentive Indicators, and Main Science and Technology Indicators,
March 2017.

5. As percentage of total government support, 2014 vs. 2006
Trends in government support for business R&D, (or closest years)
Public support for business R&D through direct funding and tax incentives
As percentage of total government support, 2014 vs. 2006
A comparison of public support provided in 2014 and 2006 shows an increase in the relative importance of tax incentives among 23 out of 32 countries for which data are available
Source: OECD, R&D Tax Incentive Indicators, and Main Science and Technology Indicators,
June 2017.

6. How is public support split between direct funding (R&D procurement + grants) and tax support?
Direct government funding of business R&D and tax incentives for R&D, 2014
As a percentage of GDP
Some countries give little direct funding, but provide significant assistance through the tax system. This is the case of countries such as Australia, Canada and the Netherlands.
As a percentage of GDP, tax relief for R&D expenditures is largest for Ireland, France, Belgium and Korea, followed by Australia.
As you see, Brazil’s support for business R&D is low as a share of GDP, and the largest part of this support if provided directly.
Source: OECD, R&D Tax Incentive Indicators, and Main Science and Technology Indicators,
June 2017.

7. Key R&D tax incentive design features 29 OECD countries in 2016 (up from 16 in 2000)
Types of schemes used in OECD and other major economies
Number of schemes
Payroll withholding tax credit and social security contribution exemption 7
Source: OECD, R&D Tax Incentive Indicators, March 2017.

8. Preferential tax treatment of SMEs and young firms
Key R&D tax incentive design features 29 OECD countries in 2016, up from 16 in 2000
Types of schemes used in OECD and other major economies
Number of schemes
All enterprises
SME
PWHT/SSC liability
Indefinite
Limited
Not applicable
Refund
Carry-over
Thresholds,Ceilings
Preferential tax treatment of SMEs and young firms 8
Source: OECD, R&D Tax Incentive Indicators, March 2017.

9. Implied tax subsidy rates on R&D expenditures, 2016
1-B-Index, by firm size and for positive profit scenario
Vertical axis: for each next dollar spent on R&D, how much is subsidised by the government?
Taking each country’s tax relief provisions, what support can firms expect to receive for an extra EUR spent on R&D?
B-index: a method to compare the extent of tax relief across countries. Takes into account:
R&D tax incentive design features
Baseline tax deductions; CIT rates (SMEs; large firms)
Features of typical R&D performer
OECD extensions:
Different firm and profitability scenarios (→ carry-over and refund provisions)
Thresholds and ceilings (distribution of R&D)
It is difficult to compare tax reliefs across countries as fiscal legislation is complex and multi-dimensional. The purpose of the B-index is to measure the after-tax cost of investment on R&D for a given pre-tax cost. The B-index takes into account both corporate income tax and tax reliefs related to R&D. It is based on a standard approach in the fiscal literature (“effective rate of taxation”).
Calculated as: B= 1-A/1-T
A is the combined NPV of allowances and credits applying to R&D outlays. T is the corporate tax rate.
Source: OECD, R&D Tax Incentive Indicators, March 2017.

10. Implied tax subsidy rates on R&D expenditures, 2016
1-B-Index, by firm size and for negative profit scenario
MEANING OF NEGATIVE ?
Source: OECD, R&D Tax Incentive Indicators, March 2017.

11. Is more government support associated with higher R&D performance?
Business R&D intensity and government support to business R&D, 2014
Source: OECD, R&D Tax Incentive Indicators, and Main Science and Technology Indicators,
June

12. Is more government support associated with higher R&D performance?
Business R&D intensity and government support to business R&D, 2014
Source: OECD, R&D Tax Incentive Indicators, and Main Science and Technology Indicators,
June

13. Impacts of expenditure-based tax support

14. Impacts on R&D investment (‘Input additionality’)
R&D price elasticity = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑅&𝐷 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑅&𝐷
Robust evidence of positive effects, with average long-run elasticity around 1 (Parsons and Phillips, 2007)
But there is variation across countries and firms!
The short-run elasticity smaller than long-run (due to adjustment costs)

15. Impacts on R&D investment (‘Input additionality’)
R&D price elasticity = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑅&𝐷 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑎𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑅&𝐷
Robust evidence of positive effects, with average long-run elasticity around 1 (Parsons and Phillips, 2007)
But there is variation across countries and firms!
The short-run elasticity smaller than long-run (due to adjustment costs)
Also evidence of positive effects on:
The wage bill for researchers (Agrawal et al., 2014; Rao, 2015)
The incidence of non-R&D firms beginning to do R&D (Corchuelo and Martinez-Ros, 2009; Haegeland and Moen, 2007)

16. Impacts on innovation inputs – further considerations
Might firms be re-labeling existing activities?
not supported by evidence (Mansfield, 1986; Hall, 1995)
Maybe input prices are increasing?
Especially if there is a limited supply of researchers
Studies find effects - Goolsbee (1998); Haegeland and Møen (2007); Lokshin and Mohnen (2012); and Lokshin and Mohnen (2013)
But this could reflect quality too – Moretti and Wilson (2014)
The induced projects might have low productivity ?
Evidence on productivity of marginal projects ?

17. Impacts on innovation output (eg. patents, new products, new processes)
Estimation challenges:
Imperfect measures – patents...
Time lag
Spillovers
Evidence of positive impacts: (Czarnitzki (2011); Foreman-Peck (2012); Moretti and Wilson (2014); Bosenberg and Egger (2017); Dechezleprêtre et al. (2015)).
input additionality as a necessary condition

18. Impacts on wider economic outcomes
R&D performance & innovation
Productivity - employment
R&D tax incentives
Effect on productivity and employment ? ?

19. Impacts on wider economic outcomes
R&D performance & innovation
Productivity - employment
R&D tax incentives
Effect on productivity and employment ? ?
Evidence on direct link scarce:
-correlation between R&D tax incentives and productivity (Brouwer et al ; Lokshin and Mohnen, 2007)
-effect on employment and wages depends on industry (Moretti and Wilson, 2014)
Cost-benefit analyses tend to find positive results but these depend on assumptions (Berger (1993); Russo (2004); Parsons and Phillips (2007);
Lokshin and Mohnen (2012); Foreman-Peck (2012); and Dechezleprêtre et al.
(2015).

20. Effects on firm dynamics
Unintended consequences for reallocation process
R&D tax incentives can protect incumbents (Bravo-Biosca, Criscuolo & Menon, 2013)

21. Effects on firm dynamics
Unintended consequences for reallocation process
R&D tax incentives can protect incumbents (Bravo-Biosca, Criscuolo & Menon, 2013)
Differential effect of R&D tax subsidies on employment growth among firms at different percentiles of the employment growth distribution
So the column on the far left shows that for the average firm, in terms of growth performance, the R&D tax credit yields an 8% point growth improvement (in the most generous scheme relative to least generous scheme). And on the far right column, we see that, among the 5% of fastest growing firms (in employment terms) the R&D tax credits lead to an almost 30 percentage points reduction in growth when you compare the country with the most generous scheme as against the country with the least generous scheme.
Top growth firms grow significantly slower in countries with the more generous R&D tax credits than in countries with less generous schemes.
The graph reports the estimated “differences in differences” in the employment growth performances of top and bottom (p90 and p10) R&D intensive industries (Computers and Construction), respectively, in the countries with the most and least generous R&D tax subsidies for large enterprises (Spain and Italy). Dotted bars report 10% confidence intervals.
Source: Bravo-Biosca, A., C. Criscuolo and C. Menon (2013)

22. Effects on firm dynamics
Unintended consequences for reallocation process
R&D tax incentives can protect incumbents (Bravo-Biosca, Criscuolo & Menon, 2013)
Firms might remain small to stay below an expenditure threshold
some evidence but effects small (Dachis and Lester, 2015)

23. Effects on location of R&D : Is total R&D increasing, or just relocating ?
Cross-border effects are important:
R&D in one country responds to a change in the price of R&D in another (Bloom and Griffith, 2001; Montmartin and Herrera, 2015)
Most of the increase in US state-level R&D due to tax incentives is linked to decreases in nearby states (Wilson, 2009)
Factors besides R&D tax credits are more important in MNE location decisions:
Belberdos et al (2016)

24. Tax incentives vs. direct support
R&D grants
Discretionary
Costlier administration
Allow targetting projects with high social returns
Tax incentives
Non-discretionary
Cheaper to administer
More suitable for R&D that is closer to market
Basic research, defence, energy, health

25. Tax incentives vs. direct support – further considerations
Limited evidence on:
Their relative effectiveness
larger additionality for tax credits but they support different types of projects (Haegeland and Moen, 2007)
grants more suitable for young, financially constrained firms (Busom et al, 2014)
Their interaction
substitutes – Dumont (2015), Montmartin and Herrera (2015)
complements – Haegeland and Moen (2007), Falk (2009)
Limited data availability partly explains the scarcity of analysis of policy interactions (an exception is Guerzoni and Raiteri [2015], which examines interactions between public procurement, R&D tax credits and public grants).
A study which has done just this is Hemel and Oullette (2013). This work considers the circumstances under which patents, grants, tax incentives or innovation prizes might be the best instrument – singly or in combination – for meeting different innovation challenges. The authors give an example of a policy that was built around coherently interacting policy instruments, namely the 1983 Orphan Drug Act in the United States. The Act combined three types of incentive: grants for drug development; an extension of market exclusivity (a patent-like reward); and a tax credit covering 50% of the expense of clinical testing. Drug development increased 13-fold compared to the decade prior to the Act. Combining the ex ante incentives (grants and a tax credit) with market exclusivity was synergistic. But a tax credit by itself would be ineffective because some small-molecule drugs are relatively easy to replicate (many firms could do so, making their commercial advantage short-lived). Market exclusivity, however, creates a first-mover advantage, which increases the effectiveness of the tax credit, especially when drug development involves capital constraints.

26. Issues of firm and design heterogeneity for R&D tax incentives
Small vs. large firms
potentially stronger effect on small firms (Baghana and Mohnen, 2009; Azcona et al., 2014; Romero-Jordán et al., 2014; Castellacci et Lie, 2015; Rao, 2015).
cash refunds are important
Incremental vs. volume-based incentives
incremental incentives have higher incrementality ratio (Parsons and Phillips, 2007; Lokshin and Mohnen, 2012)
but may distort timing of R&D (Hollander et al., 1987; Lemaire, 1996)
Temporary vs. permanent
limited take-up of a short term scheme (Kuusi et al., 2016)
predictability important (Rao, 2015a; Guellec and Van Pottelsberghe De La Potterie, 2003)

27. Impacts of income-based tax support

28. Income based-incentives: policy issues
Less widely used than expenditure-based schemes. But adoption has significantly increased. Recent examples:
The “patent box” introduced in Italy
Ireland’s Knowledge Development Box (KDB) regime
“Tax Exemption for Income from Technology Acquisition” scheme introduced in Korea in 2015.
Key design features: types of income, IP and company qualifying and the use of thresholds or ceilings that may limit the generosity of income-based tax relief.
Royalties represent the most common category of income qualifying for tax relief.

29. Income based-incentives: policy issues
A large share of patents are held by a small number of large multinational enterprises
risk of profit shifting across jurisdictions

30. R&D expenditure and the IP bundle of the top R&D companies, 2012
Cumulative percentage shares within the top 2000 R&D companies
Source: OECD, STI Micro-data Lab: Intellectual Property Database, June 2015.

31. R&D expenditure and the IP bundle of the top R&D companies, 2012
Cumulative percentage shares within the top 2000 R&D companies
Source: OECD, STI Micro-data Lab: Intellectual Property Database, June 2015.

32. Income based-incentives: policy issues
Firms might shift focus on innovations that lead to outcomes susceptible to protection by IP rights
Effects on innovation may be limited because
benefits materialise years after investments, does not help young, credit-constrained firms
only rewards successful innovation – does not mitigate the inherent risk of performing R&D
But the policy might have targets besides innovation:
attracting multinationals
income-based provisions may push firms to focus on innovations that lead to outcomes that are susceptible to protection by IP rights and, therefore, distort the choice of firms to focus on more applied research (Akcigit et al., 2013) or on products that are closer to being introduced to the market.

33. Income based-incentives: evidence is limited
No effect on R&D investment in Belgium (Dumont, 2015)
Effect on R&D investment in the Netherlands half of that for expenditure-based tax incentives (Den Hertog et al., 2016)
Effect seen on location of patents rather than local R&D investment (Alstadsæter et al., 2015) – therefore, local performance requirements are important

34. Main conclusions
R&D tax incentives should account for heterogeneity among potential R&D performers and the circumstances of young, innovative firms with no or limited profits.
R&D tax incentives should include carryforward provisions, cash refunds or reductions in social security and payroll taxes, to fully benefit small and young firms.
Policymakers should consider balancing R&D tax incentives with direct support.

35. Main conclusions - continued
Stable and predictable incentives are likely to have a stronger impact on R&D investment.
Income-based incentives should be treated with caution.
Using fiscal incentives to attract mobile R&D by MNEs is likely to have only limited effects.
Governments should ensure R&D tax incentive policies provide value for money, through ex-post evaluation linked to ex-ante assessment of new initiatives.

36. Available resources Thematic reports:
OECD estimates of government tax relief for R&D in business,
Design of tax relief for R&D and implied tax subsidy rates, 2016
OECD R&D tax incentive compendium
Country profiles released on March 23, 2017.
STI Policy paper: R&D Tax Incentives: Evidence on design, incidence and impacts
Tax working paper: Fiscal incentives for R&D and innovation in a diverse world
Reports and profiles to be updated annually, as part of EU-sponsored project

37. Thank you
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