Innovatia

Stability and predictability needed Industry investment, particularly as it relates to services and technology, is a strong enabler of productivity growth. But businesses that in- vest in R&D require stability and predictability to plan their R&D investment in the face of glob- al economic volatility, particularly in light of the post-COVID-19 economic conditions. Research has shown that the beneficial effects of R&D tax incentives are greatly reduced when those incentives are modified frequently. By creating a stable program and committing to an internationally competitive R&D tax incentive, Australia will be able to attract investment and retain positive “spill-over” effects that will pro- mote productivity and economic growth in the long term. Frequent changes and reductions to R&D tax incentives reduce efficacy and lead many companies to consider either locating their R&D programs elsewhere and/or reduc- ing their operations locally. Proposed changes to Australia’s Research and Development Tax Incentive (RDTI) saw a corresponding drop in Australia’s business expenditure on R&D as a percentage of GDP, from 1.0 per cent of GDP in 2015–16 to 0.9 per cent of GDP in 2017–18. R&D tax incentives should be designed to meet the needs of large corporations and young, knowledge-based firms while protecting local resources and intellectual property from inap- propriate cross-border planning. Recent inter- pretations by regulators of eligible R&D activity and associated expenditure have caused an el- ement of uncertainty across the business com- munity, particularly with respect to software - and technology-related R&D claims. Arguably, this has contributed to a drop in R&D expend- iture, as shown in the following graph. A com-

benefit to com- panies with a

Government Investment in the RDTI

bination of legislated reductions to the benefit, business’ lack of confidence in the program and more attractive programs offshore have all had an influence. Best practice in Europe A 2014 EU report put forward principles of best practice for R&D tax incentives, grouped into three categories: scope, target and practice. According to the report, tax incentives should, inter alia: • target expenditure that has strong knowl- edge-related flow-on effects – research has shown that larger firms contribute more to spill-over effects be volume-based (such as Australia’s RDTI) rather than incremental, as volume-based regimes are more readi- ly understood and applied, do not distort investment planning and incentivise R&D expenditure at all levels • provide a carry-over facility to enable firms to receive the benefit even when they are not yet profitable (such as cash refunds, as per Australia’s RDTI) • target younger and smaller firms – Aus- tralia’s RDTI provides a relatively generous “By committing to an internationally competitive R&D tax incentive, Australia will be able to attract investment and promote long-term productivity and economic growth.”

turnover under $20 million, and this is one of the strengths of the exist- ing program • conduct systematic evaluations (according to international stand- ards) to ensure the efficacy of the regime. Both global and local research supports the contention that R&D centives improve productivity,

2,500

2,000

1,500

1,000

500

tax in-

gener- ate impor- tant spill-overs, and support STEM 0 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Refundable Non-refundable Source: Australian Government Department of Industry, Science, Energy and Resources. (2019). Science, research and innovation (SRI) budget tables (2019–20).

employment and wage growth. There is, how- ever, a tension between the attempts of gov- ernments to reduce taxes foregone as a conse- quence of R&D tax incentives and the need to acknowledge the critical short-, medium- and long-term benefits that such incentives pro- vide. If R&D tax benefits are reduced or restricted, it is considered that companies may reduce their existing baseline R&D expenditure in Aus- tralia (by reducing product and process R&D), defer higher-risk R&D and/or undertake R&D elsewhere. Alan Garcia was the Asia Pacific Regional R&D Partner for KPMG, between 2000 and 2020

Video: Research and Development, commonly shortened to R&D, can be an expensive pro- cess, but you get what you pay for – in this case, ongoing opportunities for product and service improvement, happier customers and clients, and strong prospects for growth within the business. The key? The right incentives to get business owners investing – more detail in this video.

INNOVATIA

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