OECD - R&D tax incentives of greater benefit to multinationals; program review as part of BEPS 

October 10:  According to a report released today by the Organisation for Economic Co-operation and Development (OECD), tax incentives to encourage businesses to invest in research and development (R&D), to boost innovation and drive economic growth, offer a greater benefit to multinational enterprises. Governments, therefore, are encouraged to review their R&D tax incentives as part of a broader effort under the base erosion and profit shifting (BEPS) action plan.

According to today’s OECD release:

  • Multinational enterprises benefit the most from such tax incentives because they can use tax planning strategies to maximize their support for innovation—creating an “unlevel playing field that disadvantages purely domestic and young firms.”
  • The tax rules that enable multinational entities to shift profits from intellectual assets (e.g., patents) are already being reviewed as part of the OECD’s Action Plan on base erosion and profit shifting (BEPS).
  • Governments need to review their R&D tax incentive programs, to reduce the risk that countries are foregoing significant tax revenues in their drive to boost investment while not recognizing a commensurate rise in innovation in their economy.

Aspects of tax incentive programs to be reviewed include: (1) the scope of eligible R&D; (2) eligible firms that qualify for the incentives; and (3) the treatment of large R&D performers.

The OECD noted that in many countries, the current tax incentives may be more costly than intended, particularly as tax relief has become more generous in recent years and the full cost is not always transparent as these incentives are considered “off budget” as a tax expenditure.

The OECD analysis also suggests that well-designed direct support (such as grants and contracts) may be more effective in stimulating R&D than previously thought, especially for “young firms.”

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