Commission report identifies best practices for countries aiming to promote innovation
A European Commission-sponsored study on the use of tax incentives to promote innovation and competitiveness in Europe has found that countries with the lowest innovation performance favour the use of tax measures to boost technological innovation across the whole economy. 'Corporation tax and innovation: issues at stake and review of European Union experiences in the nineties,' which focuses primarily on France, Germany, Spain and the UK, aims to identify good practice in the area of tax incentives for innovation and stimulate debate on the advantages and disadvantages of using fiscal regimes to promote innovation in companies. The study found that several European countries with a high innovation performance, including Finland, Sweden and Germany, prefer to use financial rather than fiscal incentives to target support to key technological sectors. 'In countries which already have a high level of technological innovation expenditure, there is less of an argument in favour of further fiscal promotion and a genuine fear that the cost of introducing fiscal incentives could prove highly expensive to implement,' say the report's authors, explaining that 'the governments of these countries prefer instead to use their resources to develop specific actions within certain industries or key technologies.' The reverse is true for many EU countries with lower innovative performances, including Portugal, Spain and Italy, which tend to adopt general programmes of fiscal incentives to promote a wide range of technological innovation activity in order to 'stimulate activity across the whole economy.' This approach, says the study, 'has the advantage of allowing business (i.e. the market) to decide which sectors present the greatest opportunities for future business success.' The study draws the conclusion that 'tax incentives may be used to stimulate increased expenditure across a wide range of innovation activities - allowing companies to decide their priorities - whilst financial incentives are more likely to be concentrated on specific governmental identified priorities.' The study also found that amongst all the tax incentives studied, 'volume-based' schemes, which reward all expenditure on a certain activity, are the least complicated to administer and easiest for companies to understand and calculate. The study also pinpointed several examples of 'good practice,' including the UK's R&D tax credit for SMEs (small and medium-sized enterprises), a Spanish tax credit to support the acquisition of new information technologies and France's tax credit to encourage patent registration and the introduction of new software. In addition, the report also points to differences in the way innovation is defined and targeted in different Member States, highlighting that the difficulty of defining innovation activities can mean they miss out on tax measures targeted towards boosting private sector research. Although all EU countries have policies to promote innovation using either financial or fiscal incentives or a mixture of both, many limit their fiscal definition to concepts of R&D (research and development). In some cases, this definition includes concepts which would normally be thought of as outside R&D, while some countries use separate definitions for individual innovation activities. The report says that Spain is the only country to provide a global definition of innovation within its fiscal legislation, using a definition of technological innovation formulated by the OECD (Organisation for Economic Cooperation and Development). 'This new and innovative approach to the fiscal treatment of innovation,' states the report, 'has enabled Spanish authorities to provide incentives for several activities which other countries have traditionally chosen not to assist.' The Spanish approach helps to boost innovation, say the report's authors, by supporting activities - such as industrial design and technology acquisition - which have not traditionally been targeted by fiscal incentives as they lie outside of R&D. This approach also helps benefit small companies, who often do not have the facilities to carry out R&D and benefit from tax incentives which prioritise this alone. A review of stakeholders' views carried out for the study also found that public administrations see R&D as easier to define than technological innovation activities, and explains that they 'generally believe that a precise definition of innovation within fiscal legislation would render policy complex to implement, as innovation involves many activities which are difficult to delimit.' The report calls for the impending review of the Community framework on State aid for R&D, which is due to take place by the middle of this year, to update its categorisation of innovation. At present, says the report, the framework 'does not consider innovation as a separate category of R&D,' meaning that 'State aid for activities that could be regarded as innovative but do not correspond to the categories mentioned in the current 'Framework' can benefit from State aid only if it conforms with the Commission policy on investment.'