The Consequences of Tax Base Rules on Enterprise Innovation in the European Union

Abstract

Traditionally, there is an important role that external conditions such as establishment of tax rules can play in fostering innovation process in companies. When considering Innovation Union in the European Union context, we need to take into consideration the fact that companies meet twenty-eight different tax systems. While the differences concerning the nominal tax rates are obvious, another aspect comprising tax base rules differences is less visible, although they can play a relevant role in stimulating innovation activity. In some countries, the tax base composition is affected by the existence of R&D tax incentives concerning the company’s income tax, but the situation differs according to the EU member state.

Our study questions the existence of the link between the above-mentioned aspects of national tax regulation and a country’s innovation performance with a special emphasis on the entrepreneurial innovation activity. In accordance with a broader definition of innovation activity, both the R&D expenditure and the non-R&D innovation expenditures in the business sector are taken into account in our analysis. For empirical testing, the Granger causality methodology and panel fixed-effect regression analysis are applied.

Our results find evidence that countries proposing more generous possibilities in the statutory or effective tax rates don’t meet more suitable performances in entrepreneurial innovation activity. Similar results can be found in estimating the impact of different tax base rules, approximated by the difference between the statutory and the effective tax rate. Another important aspect of our study concerns testing of correlation between different forms of R&D tax incentives and enterprise innovation activity. Our results indicate a positive relationship between R&D tax incentives and enterprise R&D expenditures while a negative relationship between such incentives and enterprise non-R&D innovation activities can be identified as well. It seems that tax incentives affecting the income tax base composition (enhanced allowances and accelerated depreciation) do not indicate considerably different results from those proposed by the tax incentives affecting the income tax rate (tax credits and patent boxes). In conclusion, the results we have identified are interpreted in the context of the European Commission initiative of the rebirth of the Common and Consolidated Corporate Tax Base (CCCTB) proposal, announced in 2016. Thus, the chapter tries to contribute to the renewal debate concerning the consequences of CCCTB from the perspective of business innovation activities.