Abstract
This chapter will outline the longstanding strategy of the EU to incentivize and foster R&D. Part of this strategy has been to develop tax policy recommendations concerning specific tax incentives for R&D expenditure. In recent years, many EU Member States have also developed specific tax incentives concerning income derived from intellectual property (so-called IP-conditioned tax incentives). The effect of IP-conditioned tax incentives, insofar as they have been evaluated, appear to be inconclusive. On the one hand, in practice it does seem that certain R&D tax incentives indeed lead to opportunities for companies resulting in observable incremental increases in additional R&D. However, on the other hand certain IP-conditioned tax incentives may lead to aggressive international tax planning where there is no real nexus with actual ongoing or additional R&D.
Vinod Kalloe: Head of International Tax Policy, KPMG Meijburg & Co Tax Lawyers Amsterdam, and former European Commission national expert.
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Notes
- 1.
See for example Bloomberg Innovation index 2015 where some of the top-ranked countries do not offer specific R&D and IP-conditioned tax incentives: http://www.bloomberg.com/graphics/2015-innovative-countries/.
- 2.
‘Carry forward’ is an accounting technique that applies the current year’s net operating losses to future years’ profits in order to reduce future tax liability. ‘Carry backward’ is an accounting technique with which a company retroactively applies net operating losses to a preceding year’s income in order to reduce tax liabilities present in that previous year.
- 3.
European Court of Justice, Judgment of 10 March 2005, Case C-39/04.
- 4.
The accounting method for calculating depreciation takes an equal amount (or percentage) of the asset’s cost as an expense for each year of the asset’s useful life.
- 5.
‘Basic or fundamental research’ is the experimental or theoretical work undertaken primarily to acquire new knowledge without any particular view to a specific practical application of that knowledge.
‘Applied research’ concerns the original investigation undertaken in order to acquire new knowledge that is, however, directed primarily towards a specific practical goal. In other words, this research is carried out in order to acquire new knowledge for the purpose of applying it in practice.
‘Experimental or ordinary research and development’ is systematic work, drawing on the knowledge gained from research and practical experience, that is directed to producing new materials, products and devices, or to installing new processes, systems and services, or to substantially improving those already produced or installed. The aim of this form of R&D is to apply scientific or technical knowledge to develop new or significantly improved materials, products, processes, systems or services.
- 6.
For more budgetary impact analyses see World Tax Journal 2015/1—Innovation through R&D Tax Incentives: Some Ideas for a Fair and Transparent Tax Policy by Paolo Arginelli.
- 7.
IP-conditioned tax incentives operate under different names in the EU member states such as patent boxes, IP-boxes, license boxes, innovation boxes and knowledge development boxes.
- 8.
EU State aid decision (N480/2007). Spain has specifically requested for EU Commission State aid approval. Other EU Member States have decided not to request for this specific approval based on their own analysis that their IP-conditioned tax incentive cannot be considered contrary to EU law.
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Kalloe, V. (2016). IP-Conditioned Tax Incentives: The Right Approach to Stimulate Innovation and R&D in the European Union?. In: Prud’homme, D., Song, H. (eds) Economic Impacts of Intellectual Property-Conditioned Government Incentives. Springer, Singapore. https://doi.org/10.1007/978-981-10-1119-1_5
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