Tax incentives for R&D in the context of the development of fiscal space

Abstract

The article deals with the main R&D expenditure based tax incentives such as tax credit and enhanced allowances in the context of the development of fiscal space due to their impact on innovative activities of loss-making, small and medium enterprises as well as startups. The author disclosed basic features of R&D expenditure based tax incentives in comparison with tax exemptions and accelerated depreciation. Cross-country comparisons in OECD revealed that it is often a case when SMEs and startups enjoy R&D tax credit and enhanced allowance with higher rates. In addition, they can also claim full reimbursement of unused tax benefits for R&D while large companies can only count on partial or even non-reimbursement of unused tax benefits and limited carry over period. Implied tax subsidy rates on R&D are analyzed through different OECD countries, as well as through enterprises different in size and profitability. In 2019 the largest R&D tax benefits were offered to profitable SMEs in France (ITSR was 43%) and Portugal (ITSR was 39%). The ITSR methodology is used to work out scenarios of introduction of R&D expenditure -based tax incentives in Ukraine. Calculation results are presented. The state of R&D tax incentives in Ukraine in the case of aircraft industry is analyzed. The introduction R&D expenditure -based tax incentives is argued as a replacement of tax exemptions which are currently used as a measure for R&D promotion in the aircraft industry in Ukraine in terms of improvement of R&D tax support efficiency and spur successful development of high value-added industries as an important prerequisite for the development of fiscal space in Ukraine.