Crediting R&D
Ian Ross-Gowan, a PhD student in tax at the Australian School of Business and an R&D consultant, takes a more positive view of R&D credits. Ross-Gowan agrees that tax credits do not necessarily create new R&D, but they encourage businesses to do more research within an existing project or to do more regular upgrades of their R&D.
“I’ve had personal experience of that with OneSteel,” says Ross-Gowan, who is a former group taxation manager of the steel-maker. “Most projects are reviewed on a variety of measures, including discounted cash flow of payback period, and if you include the tax effect of that then that would raise a project’s possibility of being accepted and being funded.”
Ross-Gowan cites data showing that in 1985, the year before the tax concession was introduced in Australia, business expenditure on R&D was about 0.39% of GDP, but by 2008 that had risen to 1.35%, due in part to the tax credits.
IP-intensive companies rely heavily on technology and innovation for success and so a key consideration in where to locate IP is access to suitably trained and educated personnel. Walpole and Riedel cite one respondent who said that the UK education system and its training of scientists and engineers was more important to the company than the UK tax system. If the UK stopped producing qualified technicians, that company would leave the country. Another company located its IP in the US because the software developers that were key to its business success were available there and nowhere else.
But the survey indicated that Western nations might be losing this long-held advantage. Several respondents noted that China and India have started to offer an educated workforce that is cheaper to employ. China and India, however, lose out on another key factor in the location of IP: the protection that they offer companies for their valuable IP.
“The risk of loss of IP protection has meant that some respondents are prepared to use these jurisdictions in a limited way and arrangements are made to ensure only limited IP or low-value IP are exposed to risks in such jurisdictions,” the authors write. “On the one hand it would appear that the attractions of low wages, costs and sound technical expertise was making jurisdictions such as China and India attractive – but it was clear that the risks inherent in operating in those jurisdictions still favour countries in which the means of protecting IP are strong and accessible.”
Other factors that can influence where a company locates its IP are infrastructure that supports manufacturing and the markets where the IP is to be used. Nonetheless, this is not to say tax is not a factor at all, or that governments can’t improve their tax administrations to help attract IP.
“The interviews also brought out that businesses do look around for where they are going to get a good tax deal, the very big ones do negotiate with tax authorities,” says Walpole. “If they are interested in attracting the custom of the companies such as those we were interviewing, they need to be open to discussions with them and they need to respond.”
