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The really impacted tax incentive is to provide a difference to countries in attracting and maintaining capital investment. As we have seen in recent years, particularly after the financial crisis, there is a real battle for capital in the world, in particular in this region. And what we are finding is that governments are particularly looking at how they can use as a lever headline corporate tax rights and augment them by taxing incentives for R&D in particular. There is a real recognition that the value of R&D’s clear. It underpins economic growth and hence we are seeing a real surge in activity in this particular area.
Whilst there are many companies who are taking advantage of R&D tax incentives, we are seeing that there’s inconsistencies in the region and indeed around the world. The whole issue of R&D tax incentives has truly become a global issue and there are companies out there who now recognize, just like in transfer pricing and other taxes, that there is a real imperative to ensure that processes are aligned around the world.
The R&D landscape in Asia Pacific is really an interesting story. We have on one hand those economies that have traditionally relied on investment in technology and R&D to underpin their growth, such as Japan and Korea. Indeed, Japan for a long time has been in the top three or four economies in the world. It now rates around number four in the world for it’s R&D spend but Korea, interestingly, is number two in the world. Now that’s a fantastic indication about how those economies have been able to take technology in areas like electronics and automotive to be able to put themselves on the global map. What we don’t have at the moment is an increase in the R&D spend amongst the developing economies such as China and India. We think though that the governments in those locations are very, very intent on ensuring that they invest heavily in R&D so that the trends that are being set by Japan and Korea can also be replicated.
There are a myriad of factors that a company should consider in deciding where to locate its R&D efforts. Clearly tax is an important consideration. Headline corporate tax rates, other taxes, indirect taxes, but also R&D incentives and whilst at face value it might be attractive to locate ones R&D activities in a place which has the highest rate, it’s really important for companies to understand what is the certainty of achieving those benefits and outcomes. For example, is it a mature rating or is it an emotive rating with a lot of uncertainty around outcomes? Whilst particularly in the services industry and in IT companies are a lot more agile than they used to be in manufacturing industries, it still is important because these are long term decisions. Ultimately it is only affective in considering where to invest in R&D, considerations also need to be made around what the local labor costs are, infrastructure, access to engineering and other scientific resources.
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