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R&D Tax Credit Program
Provincial Incentives
Federal Incentives
Government Incentives
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Government Incentives for R&D: International Comparisons
Many countries provide both tax and non-tax incentives to encourage
R&D activities within their borders. Specific incentives take many
different forms. Table 5.5 highlights the differences in the income tax
treatment of R&D in the G-7 countries, plus Australia and Sweden. The
Committee notes that the Canadian system of income tax incentives for SR&ED
provides one of the most favourable investment climates for R&D in
the world.17
Countries are ranked in Chart
5B by comparing the effective tax-subsidy rates inherent in a country’s
income tax treatment of large manufacturing businesses. Specifically, the
tax-subsidy rate measures the extent to which the cost of R&D is reduced
by the value of incentives including tax credits, invest-ment allowances,
financing deductions and accelerated write-offs relative to the economic
cost of the investment.18
For example, if an R&D project costs $100 in economic terms and the
tax-subsidy rate is 10 percent, then the cost of the R&D project for
the investor is $90. The greater the tax-subsidy rate, the more that R&D
is encouraged.
The Chart shows that, after taking account of both federal and provincial
incentives, Canada has the most favourable income tax treatment for R&D
investments of the countries compared. Australia, which provides a bonus
income tax deduction (but which recently reduced this incentive from 150
percent to 125 percent of eligible current and capital spending on R&D),
is second. Germany and Italy, which along with Sweden do not offer special
incentives for R&D, are lowest; R&D activity bears some tax since
capital expenditures for R&D are depreciated rather than expensed.
Each of the other countries provides some form of income tax assistance
for R&D.
Chart
5B
R&D Tax-subsidy in
the G-7 Countries, Australia and Sweden, for Manufacturing
| Country |
Income
Tax Deduction |
Income
Tax Credit |
| Canada |
Current expenditures:
100% Capital expenditures other than land and buildings: 100% |
Base: all expenditures
Rates: 20% generally; 35%
for certain CCPCs; additional credits in provinces (Table 5.4) Refundable
for CCPCs (100% or 40%) Three-year carry back; 10-year carry-forward Taxable:
reduces base for deduction (plus some provincial incentives) |
| Australia |
Minimum threshold:
A$20,000 Current expenditures: 125% Capital expenditures: 125% over three
years on a straight-line basis |
Not applicable |
| France |
Current expenditures:
100% Capital expenditures: straight-line or declining balance; some acceleration
for R&D |
Base: incremental
R&D spending compared to previous two years; positive or negative Rates:
50% Refundable for new businesses; three-year carry-forward/refundability
for other firms Annual limits on tax credit use |
| Germany |
Current expenditures:
100% Capital expenditures: straight-line or declining balance |
Not applicable |
| Italy |
Current expenditures:
100% (or over five years on a straight-line basis) Capital expenditures:
straight-line generally; some acceleration for R&D |
Not applicable |
| Japan |
Current expenditures:
100% (or over five years) Capital expenditures: ordinary (straight-line,
declining balance or any other approved method), initial or accelerated
depreciation; some acceleration for R&D |
Three tax credits;
one for incremental R&D spending Base for incremental credit: R&D
spending in a year in excess of largest annual R&D spending since 1966
Rates: 20% general credit 6% credit for small or medium-sized enterprises
(SMEs) Annual limit on tax credit use No carry over of unused credits |
| Sweden |
Current expenditures:
100% Capital expenditures: declining balance |
Not applicable |
| United Kingdom |
Current expenditures:
100% Capital expenditures: 100% |
Not applicable |
| United States |
Current expenditures:
100% (or over five years on a straight-line basis) Capital expenditures:
modified accelerated cost-recovery system; some acceleration for R&D |
Temporary Base:
R&D spending in excess of the product of the ratio of R&D spending
to gross receipts for the period 1984-88 and the average of the taxpayer’s
gross receipts for the four preceding years Rate: 20% Annual limits on
tax credit earned Three-year carry back; 15-year carry-forward Taxable:
reduces base for current deduction |
|
| *This
material was extracted with permission from the Report of the Technical
Committee on Business Taxation (known as the Mintz Report); section 5.17 |
End Notes:
Missing footnotes are relevant for the purposes of reviewing the material
presented on this site.
17 Warda, Jacek P. 1997. R&D Tax Treatment in OECD
Member Countries. Paris: OECD.
18 Note that if economic costs of the R&D project
are fully deducted in determining income, then the tax subsidy rate would
be zero. |
