In light of proposed changes to the SR&ED program announced in March’s federal budget, Canada retains a position as offering one of the most attractive R&D incentive programs globally.
Let’s look at a few R&D tax credit programs across the globe to see how SR&ED stacks up. Currently, Canada’s SR&ED program offers a 35-percent refundable tax credit to Canadian Controlled Private Corporations (CCPCs) on the first $3 million of R&D expenditures, and a 20-percent non-refundable Investment Tax Credit to non-CCPCs. The general 20-percent ITC is scheduled to reduce to 15 percent beginning 2014.
To the south, the United States’ Research and Experimentation (R&E) tax credit program is in a state of transition. The R&E tax credit has existed as temporary credit since 1981, extended 14 times in indeterminate durations. Since FY2010, President Obama’s administration has been proposing to re-haul the program to permanent status, and to expand and simply the credit. Currently, the R&E tax credit program exists in two formula: the “regular” credit is worth 20 percent of qualified research expenditure above the product of the taxpayer’s “fixed base percentage”, the ratio of its research expenses to gross receipts for the years 1984 to 1988, and the average of the taxpayer’s gross receipts for the four preceding years. According to a report compiled by the Department of the Treasury last year, the regular formula is “outdated,” with “little reason to believe that the firm’s ratio of research spending to gross receipts from more than two decades ago, when multiplied by its average gross receipts over the prior four years, is an appropriate base for the taxpayer.”
The alternative simplified research credit (ASC) is equal to 14 percent of qualified research expenditure exceeding 50 percent of the average qualified research expenditure for the three preceding taxable years. The administration further proposes increasing the ASC rate from 14 to 17 percent. Both methods use an incremental expenditure method of calculation as compared to Canada’s actual benefit mechanism.
France also uses an incremental expenditure method for the basis of their R&D tax credit, Crédit Impôt Recherche (CIR), which covers 40 percent of R&D expenses in the first year, 35 percent in the second year and 30 percent in subsequent years up to €100 million (5 percent of expenses above this threshold). The CIR is deducted from the tax to be paid or refunded at the end of the third year. In certain cases, young companies are able to receive refunds immediately. CIR considers all R&D expenses. As well, expenses related to operations subcontracted to French and European public-sector research bodies are assessed at 200 percent.
In an innovation report card released by the Conference Board of Canada, Switzerland and Ireland ranked first and second followed by the U.S. in third in the broad topic of Innovation, while Canada trailed at 14. Switzerland currently does not offer an R&D tax credit incentive (yet does offer a patent box incentive to boast commercialization of research outcomes).
Ireland offers a tax credit of 20 to 25 percent for companies performing R&D; Ireland also offers a corporate tax deduction for non-capital R&D expenditures incurred by Irish trade or business companies.
Other countries that offer R&D tax credits include Australia, Austria, Belgium, Italy, Japan, Korea, Portugal and Spain.
In addition to R&D tax credits, there are additional or alternative means for incentivizing R&D and Intellectual Property. Six European Union countries have adopted “patent box” regimes to reduce the corporate tax rate on eligible intellectual property (IP) income to a nominal rate of 5 to 15 percent. Countries offering patent box regimes include Belgium, France, Hungary, Luxembourg, Netherlands, and Spain, and the UK government has committed to introducing a 10-percent patent box regime effective in 2013.