Global R&D Incentives Compared

The American Taxpayer Relief Act of 2012, P.L. 112-240, extended the and development (R&D) credit under Sec. 41 for two years to cover expenditures paid or incurred on or before Dec. 31, 2013. Though U.S. business taxpayers welcomed the extension of this tax credit, the benefit is less generous than many other tax incentive programs abroad. The main tax benefits offered by countries generally result in a tax provision benefit and involve tax credits, superdeductions (deductions greater than 100%), and corporate tax rate reductions, including patent box rates for companies that own and use patents registered in that country. United States. The United States offers an annual deduction for R&D spending and a nonrefundable tax credit for incremental R&D spending. Under Sec. 41, the R&D credit is restricted to expenditures. It permits an incremental credit for qualified research and research equal to 20% of eligible expenses and basic amounts that exceed a certain calculated base amount of such expenditures. The base amount is a benchmark of the taxpayer's past spending and is designed to ensure that the credit is applied only where there is an increase in spending above prior levels. There is also an alternative simplified version of the credit that taxpayers can elect to take in lieu of the regular credit. The alternative simplified credit equals 14% of expenses over 50% of the average expenses for the preceding three tax years. The activities must be conducted within the United States. Because the credit is nonrefundable and cannot reduce tax liability below the corporation's alternative minimum tax, it typically is not beneficial until a taxpayer has used all of its net operating loss carryovers. These limited incentives, coupled with the top corporate statutory tax rate of 35% and top individual rate of 39.6%, may diminish the United States's appeal as a site for conducting R&D operations. A summary of the R&D incentives in other developed and developing countries follows. Australia. In Australia, corporate investment in innovation is rewarded through a 45% refundable R&D tax credit for revenue of less than AUD $20 million or a 40% nonrefundable tax credit for companies with revenues above that amount. The nonrefundable R&D credit can be carried forward and used in future years. In addition, Australia has a corporate statutory tax rate of 30%. Canada. Canada offers combined federal and provincial corporate statutory tax rates from 17.5% to 31%, along with a tax credit equal to 20% of expenditures related to scientific and experimental development. Small, private Canadian-controlled corporations can claim a 35% credit on the first CAD $3 million in expenditures. Excess credits may be carried forward 20 years and back three years. China. In China, the corporate statutory tax rate is 25%. China offers a reduced corporate income tax rate for certain entities, along with a 150% superdeduction. China also offers several other indirect tax incentives for R&D. France. France taxes corporations at a statutory rate of 33. …

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