Wednesday, July 07, 2010

R&D Tax Credits - Time for a Rethink?

One of the roles of the French Senate is to work behind the scenes of government to check whether spending is all as it should be. To this end, numerous committees are created with the aim of investigating whether government led and implemented incentives are of benefit to the country as a whole, and in particular, whether they are costing the state too much - this is particularly so in these times of self-proclaimed austerity.

To whit, the finance committee of the French Senate released a report last month about the impact of incentives introduced in France's 2008 finance bill to stimulate innovation in the French economy by granting massive tax credits to companies that invested in innovation. A summary of the report in French can be found here, with a link on that page to the actual presentation made to the Senate by the committee's rapporteur, and the report itself.

The tax credits allowed by the finance bill of 2008 were pretty substantial, 30% on up to 100 million Euros expenditure per entity could be offset in tax credits for costs in associated R&D, including costs related to IP. Naturally, this has proven to be a fairly important incentive, not only for SMEs, but also for those larger corporations who just couldn't wait to claim credits left, right and center, including a tendency for holding groups to exploit a loophole that allowed its subsidiaries to claim up to the limit, allowing them a comfortable little tax nest-egg. Whilst the report acknowledges the positive effect that these measures have had on the economy as a whole, with an alleged reduction in job losses, improved competitiveness, and stimulation of research and development, it does also underline that the cost to the state has increased fairly significantly, escalating from an approximate 1.7 million Euros to 4.1 million Euros in the space of a year !

As the report outlines, despite the success, there has been a (quite logical) tendency for large corporate groups to optimise their taxation via the innovation tax credits system. The current system provides for a cap of 5% of all R&D costs on declared spending over 100 million Euros, and large corporations naturally often exceed the 100 million mark.  The upshot of this is that large corporations have created subsidiaries in order to split out amongst their respective subsidiaries the R&D expenditure burden, and thus stay under the 100 million limit per entity, thereby enabling the more interesting 30% rate of tax credit to apply. The report sees this as a way for large corporations to escape from paying their dues to the state, thereby adding to the state's massive budgetary deficit.

In order to counteract this undesired effect on the general health of the state's finances, the report has suggested that the government, in its next finance legislation, restrict the expenditure claimable to 100 million Euros per holding group. The system as a whole, would however be maintained, the objective of the government being to bring the country up to a level of investment in R&D of 3%  of GNP within the space of 3 years. At present, that rate has only evolved slowly, from 2.06% in 2007 to 2.07% in 2008, so it looks like the government still has its work cut out if it hopes to attain the 3% mark.

On the upside, the current measures have been seen to be sufficiently interesting to attract foreign investment and the creation of  41 new R&D facilities on French soil in 2009, a leap of 64% compared to the figures of 2008. 

The unfortunate position for the present government and its president is one of having made revitalising the economy via investment in R&D a political warhorse, yet finding itself in a tight spot financially, with the need to fill the state's depleted (and increasingly blackhole-like) coffers. It will be interesting to see how the government's future finance legislation will deal with this topic, which will have direct repercussions on jobs and viability of the R&D sector of the French economy.