Insights

CE Corporate R&D Activity on rise in Baltics

Kristine Jarve, Deloitte Tax partner for the Baltics, R&D Programme Leader in Lithuania

An audit and business advisory company, Deloitte, annually carries out the CE Corporate R&D Survey, aiming to map the attitudes of companies in Central Europe to investing in research and development (R&D). The fifth CE Corporate R&D Survey has been launched at the end of May and highlighted the key difficulties faced by companies in the R&D area. Additionally, it was identified how entities protect their know-how and what kind of government support they mostly use. CE Corporate R&D survey maps R&D situation in the Baltics and the Central European countries.

The Baltic Times, 2016-06-16

R&D status in Lithuania

'Due to the fast pace of technological improvements and the necessity to employ them in order to keep up with the competition, a number of Lithuanian firms are starting to invest in R&D projects and activities by greater amounts. Various grants and tax incentives have also influenced this trend', says Kristine Jarve, Deloitte Tax partner for the Baltics, R&D Programme Leader in Lithuania.

An average annual increase in spending on R&D reached 11% in 2013 and 2014, and accordingly, there is a strong demand for highly qualified labour in the Lithuanian market. A major increase in the numbers of employees working on projects and involved in activities related to R&D has been observed in recent years. Also, the number of employees involved in R&D is growing at the significantly fast pace of 24% a year on average (based on the data for 2013 and 2014).

A majority of surveyed respondents (76%) were engaged in R&D activities significantly during the previous year and spent more than 1% of their annual turnover to finance R&D activities. Over one-fifth of firms have spent above 10% and another 17% – between 5% and 10% of their turnover.

Deloitte has also surveyed companies on their plans for future investments. Almost half of the questioned companies are planning to have similar or higher investments in R&D during the upcoming one to two years. The proportion of companies that intend to increase their R&D expenditure from year 2015 until the period of 2018 to 2020 is growing.

'Research and development activities in Lithuania are making a positive impact not only at the micro but also at the macro level. Such trends are expected to continue in forthcoming periods', says Kristine Jarve, Deloitte Tax Partner for the Baltics.

Based on the results of the survey, the companies consider the ability to hire skilled and experienced professionals to be the most important criteria for performing R&D activities. Therefore, cooperation with universities and relevant research institutions is also among external factors, which have a relatively high influence on R&D spending. The respondents mentioned, that willingness to invest in R&D also depends on the financial state of the company.

It seems that Lithuanian companies has started working more closely with research, scientific centers and universities. Thirty two of 41 surveyed companies are already cooperating with third parties when carrying out R&D activities. Most of them do so because of the need to conduct research projects, others declared that including third parties is required by them in order to receive a higher cash grant.

The Corporate R&D survey revealed that half of the companies which are aware of R&D tax incentive have already applied the incentive and reduced their taxable profits. However, the other half find it difficult to understand the authorities’ approach with respect to R&D costs.

'Despite the fact that R&D tax incentive has been available for eight years already, there are still 12% of respondents who are not familiar with it at all. However, compared with the previous year, companies have more knowledge about R&D incentive available in Lithuania. This tendency gladdens indeed', says Jarve.

One of the most common reasons for not using the incentive is uncertainty in relation to tax authorities approach with respect to R&D costs. Most of the respondents stated that there is a lack of tax clarity in the assessment of subsidies or tax deductions by tax or other authorities; 22% think that guidelines on the conditions of the eligibility of the costs and their calculation are unclear; meanwhile 22% of companies stated that they often find it difficult to identify the activities that meet the R&D requirements for requesting a subsidy or a tax deduction. Similar results were obtained regarding EU R&D grants. Statistics show that as many as half of the respondents are fully familiar with R&D grants and have already taken advantage of the opportunity to receive money from EU funds and have invested in research and development projects.

According to the results, the most often used is the tax incentive for scientific research and experimental development. Also, businesses are relatively aware of available programs that encourage partnership between businesses. They are familiar with programs that help to finance trainings for employees. However, only 32% of surveyed companies have applied this. There is a need to emphasize that Horizon 2020 might be identified as another popular grant program in Lithuania. In total, 29% of the surveyed companies have already received financial support for the execution of R&D projects under the European structural funds’ measures for the period 2014-2020.

'In general, the profile of programs mentioned in this report should be raised by public institutions and private consulting firms in order to broaden the aims of companies and better inform them about the possibilities available', claims Jarve.

What’s the R&D situation in the Baltics?

Baltic companies are more positive about their R&D spending than counterparts elsewhere in Central Europe, with 28% of respondents estimating that their R&D spending exceeds 10% of turnover (21% elsewhere in CE). In addition, nearly half of Baltic companies plan to increase their R&D spending in the next one to two years, making Baltic companies’ future expectations slightly more optimistic than CE as a whole. The Baltic entities are also more optimistic than in 2014, with the percentage expecting higher short-term R&D spending increasing from 30% to 48%. Similarly, the proportion expecting an increase in medium-term spending grew from 34% in 2014 to 48% in 2015.

The most important external factors influencing R&D spending are the same in the Baltics as across CE, with respondents evaluating the availability of skilled and experienced researchers and several types of benefit as the main drivers of additional R&D spending.

However, Baltic companies are less confident than the CE average about applying tax incentives. 30% have difficulty with classifying R&D projects (CE: 18%), 23% are uncertain about the approach of tax authorities (CE: 16%), and 15% are concerned about keeping track of costs (CE: 9%).

'When conducting R&D projects, Baltic companies tend to collaborate more than the CE average with third parties (78% vs 71%). They do so mainly because it is necessary for the successful implementation of their R&D activities, not because of the formal requirements of state-aid programmes', highlights Kristine Jarve.
 

R&D status in the Central European region

Taking into account wider perspective there is a need to emphasize that a majority of surveyed Central European (CE) countries have a set research and development support programme. It consists either of direct support in the form of grants, or indirect support in the form of tax deductions. The indirect types of support also include various financial tools such as loans offered under advantageous conditions. Although there is no unified support model, the majority of EU countries use a combination of these methods. Additionally, CE companies are willing to maintain or even increase their volume of funds invested in development.

A comparison of the 2016 results with last year’s survey shows that CE companies are planning a greater increase in their R&D investments, over both the next one to two years (45%) and the next three to five years (57%). The principal drivers that are motivating companies to invest more in R&D include the availability of more types of benefits, enabling them to use a combination of grants, tax deductions etc. and the availability of skilled and experienced researchers. Moreover, most companies (71%) are continuing to collaborate with third parties, such as universities and research institutes, which is proving beneficial for both parties.

It is obvious that the key concerns expressed by companies from all surveyed countries include the uncertainties they face when the tax authorities review the subsidies and tax deductions they have used, the uncertainties in identification of R&D activities and a scarcity of qualified and experienced research personnel.

General R&D Overview in the Baltics (based on publicly available statistics)

Lithuania

From 2013 to 2014, companies’ spending on R&D increased by 28.3%, while government R&D spending rose by just 8.5%. The largest investors in Lithuanian R&D projects were foreign capital companies.

The process of establishing science and technology parks is actively progressing in Lithuania. The Ministry of Economy allocated over EUR 28 million to implement infrastructure projects in the Lithuanian Valley under the Inogeb LT-2 measure of the EU Structural Funds. Following the receipt of EUR 60 million in funding from EU Structural Funds, the government and local businesses, over the last five years 188 new R&D companies have been created, 1,833 agreements signed between companies and science institutions, 708 jobs created and 264 new technologies, services and products developed.

Latvia

Detailed rules for R&D grant programmes within the new EU programming period were developed to enable the first application calls to be launched at the beginning of 2016.
The first results of the R&D tax incentive introduced in mid 2014 became known. In the first six months since the incentive became effective, almost 100 companies used tax benefits totalling EUR 3.4 million (while eligible R&D costs totalled over EUR 11 million).

The Latvian commission set up to evaluate R&D received its first 10 projects. In a popular move among businesses, the commission took the step of hiring external IT experts to help put effective processes in place for distinguishing between what are and what are not R&D activities.

Estonia

In 2014, Estonia’s R&D expenditure totalled EUR 287 million, 12% less than in 2013. It was anticipated that R&D spending would remain on a downward trend in 2014, following large investments made in 2010-2012 that caused an exponential increase in expenditure. However, the proportion of turnover invested by Estonian companies in R&D has increased, and companies expect investments to increase further in future.

Several programmes were launched to support R&D activities. The Ministry of Economic Affairs financed R&D programmes involving product development, collaboration and technology programmes for priority areas. The Estonian Investment Agency launched a EUR 2 million programme to support service and R&D centres. More than 10 new Centres of Excellence in Research were opened during the year.

Kristine Jarve

Deloitte Tax partner for the Baltics, R&D Programme Leader in Lithuania

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