The American Taxpayer Relief Act of 2012, P.L. 112-240, extended the research and development (R&D) credit under Sec. 41 for two years to cover qualified research 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 research 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 qualified research expenditures. It permits an incremental credit for “qualified research” and “basic research” equal to 20% of eligible expenses and basic research amounts that exceed a certain calculated base amount of such expenditures. The base amount is a benchmark of the taxpayer’s past research spending and is designed to ensure that the credit is applied only where there is an increase in qualified research 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 qualified research expenses over 50% of the average qualified research expenses for the preceding three tax years.
The research 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 research and experimental development. Small, private Canadian-controlled corporations can claim a 35% credit on the first CAD $3 million in research 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 33.33% (plus a social contribution tax on some income and a temporary surtax) and offers a 30% tax credit for research expenses, as well as a patent box incentive reducing the corporate tax rate to 15% on qualifying intellectual property income.
Ireland. In addition to a corporate statutory tax rate of 12.5%, Ireland offers corporations a refundable 25% credit for research expenses. Excess R&D credits may be refunded or carried forward indefinitely. In addition, the country has implemented various government grants for expanding R&D activities in Ireland.
Japan. Japan imposes a 28.01% tax rate on corporations plus various local taxes and provides a nonrefundable maximum credit of a percentage of R&D expenditures depending on the size of the corporation, up to 20% of the corporation’s total tax liability. Corporations may carry certain excess credits forward one year.
Singapore. Singapore imposes a corporate statutory tax rate of 17% and offers a productivity and innovation credit that allows a 400% superdeduction on certain qualifying R&D expenses up to SGD $400,000; 100% and 150% superdeductions on certain expenses above SGD $400,000; a nontaxable cash payout option for up to SGD $100,000 of qualifying expenditures; and a tax deferral option. The Singapore government also offers multiple grants covering multiple fields of innovation.
United Kingdom. The United Kingdom taxes corporate income at statutory rates of 20% to 23% and offers a refundable tax credit of 9.1% of qualifying R&D expenditures. The United Kingdom also allows 100% tax depreciation of expenditures on assets used for R&D in the year of acquisition. In addition, the country provides a superdeduction of 130% to 225%, as well as a 10% patent box rate (effective starting April 1, 2013) for net income originating from qualifying intellectual property.
MAINTAINING AN INVESTMENT DESTINATION
This comparison indicates that the R&D incentive programs in the United States are far from optimal. Competition among nations to attract entities focused on business innovation and development of advanced technology is threatening the United States’s position as a leading destination for multinational R&D investments.
Tax credits, government incentives, and corporate tax rates may constitute only a fraction of the relevant factors a corporation considers when evaluating development centers; however, it is worth examining these global differences to assess alternatives. The extension of the R&D credit was an essential victory for innovation and technology advancement in the United States; however, the incentive is set to expire once again in 2014, creating year-to-year uncertainty in corporate tax planning and, in turn, weakening the effectiveness of such incentives.
By Laughlin Cutler, Esq. (email@example.com); Douglas M. Sayuk, CPA (firstname.lastname@example.org); and Camille Shoff, Esq. (email@example.com), all with Clifton Douglas LLP in San Jose, Calif.
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