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OECD Study on the Incidence and Impact of Tax Support for Research and Innovation

Periodic Reporting for period 3 - TAX4INNO (OECD Study on the Incidence and Impact of Tax Support for Research and Innovation)

Reporting period: 2019-01-01 to 2019-12-31

This OECD project, carried out between 2016 and 2019, has played a key role in monitoring and assessing research and innovation policies in Europe and beyond. Its main focus has been on the use of and impact of R&D tax incentives, which are admittedly the most “expensive” single type of policy instrument used to provide financial support for R&D activities in business enterprises across a majority of OECD and EU countries. The work was envisaged to contribute, through new indicators and empirical policy analysis, to the coordination and increased focus of individual country policy efforts to foster innovation. This project set out as its main objectives to:
(1) Provide new comprehensive evidence on the incidence and design of R&I tax incentives, building internationally comparable evidence on the size and nature of incentives provided by governments to support R&D and innovation through their tax systems;
(2) Deliver new evidence on the impact of R&I tax incentives, deepening our understanding of the impacts of R&D tax incentives on business innovation and economic performance, through within- and cross-country econometric micro-data analysis; and
(3) Foster knowledge sharing on the incidence, design and analysis of impact of R&D tax incentives.
(1) Provide new comprehensive evidence on the incidence and design of R&I tax incentives.

Under this objective, the project has effectively extended:
- the range of countries for which evidence is available over the two data collections carried out up to date
- the temporal scope of evidence - providing for the first time a truly historical perspective on policy developments in this area across countries
- the quality of evidence available, by effectively cross validating and updating information for greater accuracy, making effective use of the expert networks built through this project to ensure international comparability and consistency with other data sources
- the scope of quantified information, by extending the extent to which indicators reflect complex support patterns in different countries and render them comparable
- the frequency with which data are available - with annual updates for the statistical and qualitative outputs
- the accessibility and interpretability of the data and indicators, through various OECD dissemination mechanisms and explanatory notes

It has done so by combining quantative and qualitative methods. Qualitative insights underpin the entire exercise and a policy initiative database has been made available. Qualitative data have also been converted into quantitative policy indicators. Government tax expenditure indicators complete the portfolio of results.

(2) Deliver new evidence on the impact of R&I tax incentives
A major review of the evidence on impacts has been released at the very beginning of this project and provides the OECD reference document in this subject.
Original new work on the analysis of the impact of R&D tax incentives has resulted in two main outputs:
- A demonstration of the potential of the R&D tax support indicators to explore key policy questions at the aggregate level of economies, assessing the comparative performance of tax support vis a vis direct funding of R&D and other generic tax measures.
- An in depth, cross-country analysis of the micro and meso factors underpinning the input additionality of R&D tax support - the results of the microBeRD workstream - to be published at the end of Q1/early Q2 2020.

(3) Foster knowledge sharing

Knowledge sharing has been a central element for this project, mostly articulated through the interactions with and within expert communities with both interest and responsibility over different dimensions of the subject, particularly policy makers, government statisticians and analysts. This has been achieved through:
- Three expert and practitioner workshops on the evidence on R&D tax incentives, with wide participation from STI and tax policy and statistical communities as well as academics.
- 2 expert workshops and a major conference on R&D microdata analysis, contributing to developing statistical infrastructure within countries for microdata analysis of R&D policies.
- Setting up two and maintaining online community spaces for the two experts communities targeted in this project (R&D tax incentives and R&D microdata analysis)
- Several presentations to OECD policy committees, national governments as well as one presentation to European Commission officials in Brussels.
- Comprehensive publication of project outputs in a streamlined OECD reference website -
- Country focus - through the release of country-specific notes on R&D tax incentives, briefing governmental senior officials on the project, as well as targeted support for data infrastructure development,
- Active media campaign of key outputs, coordinated across the OECD STI Directorate and the EU DG RTD.
- Submission of papers to academic and policy conferences.
The project has resulted in understanding about the incidence and design on R&D tax incentives, facilitating a better informed debate about their prevalence and use. It has also generated new insights, in a multi-country setting that would be nearly impossible to replicate in other settings, about the impact of R&D tax relief in the context of its design of support schemes, other innovation support policies and idiosyncratic country features. The project has helped reconcile national evaluation work with cross country comparative evidence. The approach has reduced the cost and enhance the quality of collection and analysis of data on R&D tax incentives, freeing up resources within the international policy community to pursue several other innovation policy research questions. It has demonstrated the potential of micro-data infrastructures and analysis to address innovation policy relevant questions, and helped countries develop their agendas for enhancing their data and analysis strategies.

The evidence obtained from this project is widely acknowledged by the international policy community as having contributed to a significant improvement in the quality of policy discussions and decisions in this area. Of particular significance is the concrete evidence presented for the first time on:
- the relevance of tax incentives as generic business R&D support tools, providing concrete evidence on R&D input additionality and how it may be affected by business characteristics, policy design and implementation issues,
- their limitations as R&D policy tools towards concrete goals or missions,
- their limitations as instruments to incentivise business research activities, vis a vis closer-to-the-market development activities.

These findings have been informing public policy debates on the simplification of policy support structures as well as the rebalancing of the policy support mix in several capitals. Some of these debates have generated significant policy reforms. The focus on evidence has also highlighted the importance of improved governance and use of public funds as well as on enhancing the optimal utilisation of data resources within NSOs.