With an increasingly competitive range of tax benefits on offer, companies that rely on innovation for profitability and growth have an expanding range of tax-effective options for locating and structuring their operations.
Among Iberoamerican economies, Brazil leads in R&D investment, for example, by creating over 100 research institutes and by expending around 1.0 percent of its national GDP to encourage innovation1. As part of this support, Brazil pays out about USD$1 billion in R&D tax incentives annually in the form of investment tax credits2.
While Brazil may be the current leader, Chile is taking aggressive action to catch up. The Chilean government has set the goal to more than double the investment in R&D as a percentage of national GDP by 2014, an increase from the current 0.4 percent to approximately 1.0 percent. As part of this plan, Chile has significantly enhanced its R&D tax program with a series of new measures that took effect in September 2012.
Countries that succeed in promoting more R&D investment can reap substantial spin-off economic benefits. By creating a cost-effective environment for innovation, they can attract lucrative foreign research funds, producing high-value employment opportunities, improving domestic research capabilities, and promoting technological advancement. In an environment that is conducive to increased commercialism of new processes and products, domestic companies can become more globally competitive. Countries can also use R&D tax incentives to target innovation and growth in specific technologies and sectors such as environmentally friendly technologies and the renewable energy sector.
Brazil’s tax incentives for R&D
Brazil’s tax incentives are available for technological innovation activities, including activities beyond pure R&D, such as those related to technological support, IT innovation, incremental improvements to existing or new products or processes, patenting and patent protection.
If you qualify under the Brazilian R&D tax incentive program, you might be able to:
- deduct 100 percent of your qualifying expenses related to technological innovation
- write off an additional 100 percent of these expenses, depending on how many researchers are employed and whether the R&D results in intellectual property
- pay only 50 percent of Brazil’s excise tax (IPI) otherwise payable on machines, equipment or spare parts and tools used in R&D
- fully depreciate new fixed assets used in technological research in the year you acquire them
- accelerate the amortization of intangible assets acquired for use in technological research
- qualify for a zero withholding tax rate on payments abroad for the registration and maintenance of trademarks, patents and cultivars.
Brazil’s national government also offers direct grants and special funding lines to support innovative projects that contribute to the country’s development, improve the competitiveness of its economy, and raise the quality of life for its population.
Chile’s tax incentives for R&D
To attract more investment in innovation, the Chilean government recently approved significant improvements to the country’s R&D program that greatly expand the program’s scope and flexibility, as of September 2012. Among other enhancements, the credit is now available for in-house R&D and for a broader range of costs, including costs related to movable property, real estate and intellectual property protection.
If you qualify under the new Chilean R&D tax incentive program, you may be able:
- deduct 100 percent of R&D costs for corporate income tax purposes (net of costs claimed under the R&D tax credit)
- claim a 35 percent tax credit on qualifying R&D costs, to a maximum annual credit of USD1.2 million
- earn a tax credit on expenses on in-house R&D projects and R&D contracts with third-party researchers
- earn a tax credit on all R&D activities conducted outside of Chile if less than half of the R&D expense relates to activities conducted outside Chile (if half or more of the expense relates for activities outside Chile, credit is earned on 100 percent of expenses incurred in Chile and on 50 percent of the foreign expenses)
- obtain a tax credit certificate up to 180 days after the R&D project has started, even where the activities are not pre-certified.
Chile also offers a number of different governmental grant programs to encourage investment in R&D.
With countries in Iberoamerica and around the world offering lucrative incentives to compete for R&D investment, countries should take a strategic approach in deciding where and how to conduct their innovation work.
When determining the best location and structure for their R&D activities in Iberoamerica, some of the most critical factors to consider include:
- net cost of R&D
- favorable research environment
- intellectual property issues
- transfer pricing issues
- impact on other tax benefits.
Net cost of R&D
When assessing the after-tax costs of performing R&D, the analysis should factor in available country-specific R&D tax benefits, qualifying activities, costs and restrictions, other foreign investment incentives or subsidies, and labor and capital costs.
Favorable research environment
Potential R&D locations should be investigated to evaluate the quality of their post-secondary and research institutions, the success of their graduates, the pool of suitably skilled workers and the reliability of the country’s infrastructure to support R&D activities.
Intellectual property (IP) issues
The net cost of performing R&D should be considered in conjunction with the strategy for managing potential IP created by successful research. Issues to consider include which entity within the group funds the creation of IP, legal and economic ownership, and the tax consequences of any income generated by the IP.
Moving IP within the group once it has been developed can create significant tax liabilities, and so the strategy for subsequent IP ownership is crucial when planning R&D activities. Several countries, including Brazil and Chile, have introduced favorable tax regimes for income arising from IP.
Transfer pricing issues
Whatever strategy is adopted for R&D activities and IP ownership, transfer pricing issues are inescapable. Intragroup arrangements need to be priced in accordance with the transfer pricing rules of the relevant jurisdiction, including R&D services, funding of R&D, management of R&D, costsharing arrangements for the development of IP and the licensing of IP.
Where a related party is located in Brazil, transfer pricing can be especially complex because the country’s tax rules do not conform to the arm’s length principle endorsed by the Organisation for Economic Co-operation and Development (OECD).
Impact on other tax benefits
Many countries provide tax credits for taxes paid by a resident business to other countries; countries also offer a range of other tax incentives to attract investment and encourage exports. Be sure to assess the impact of R&D costs on other tax benefits when determining the value of R&D tax benefits.
Based on a review of all of these factors, you can then determine the optimal location and structure for your company’s R&D programs. For companies that depend on innovation for success, the more cash that can be channeled from savings in other areas, the more the company can invest in R&D activities to support profitability and growth.
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1KPMG International, R&D incentives and services – adding value across the Americas, 2012 edition.
2Government of Brazil, Ministry of Science, Technology and Innovation, 2011 MCTI Annual R&D Incentives Report.