Grants and Incentives Program Updates: December 2015 | Deloitte US has been added to your bookmarks.
Grants and incentives program updates: December 2015
Global developments affecting research and development
This monthly publication provides a summary and updates on the latest global developments affecting research and development, US manufacturing and production activities, employment activities, real estate and capital investment, and sustainability initiatives. More than 50 countries offer specific tax incentives, and this newsletter focuses on identifying and outlining what could be the right incentives for your organization.
New edition of Frascati Manual released
The seventh edition of the “Frascati Manual,” which provides guidelines on collecting and reporting information relating to research and development (R&D) and also may influence taxation relating to R&D in certain countries, was released by the Organization for Economic Co-operation and Development (OECD) in October 2015.
First published by the OECD in 1963, the initial aim of Frascati Manual was to enable the measurement and comparison of R&D efforts carried out in different countries. The manual includes definitions of fundamental R&D concepts, data collection guidelines, and statistical tools for classifying and evaluating R&D investments and expenses.
The rapid evolution of the global economy since publication of the original edition has intensified interest in the Frascati Manual. The scope of application of the manual has exceeded its initial target, and it has become a worldwide reference used in a wide range of policy areas, notably for funding and R&D tax incentive purposes in a number of countries.
The Frascati Manual has been revised a number of times over the years, with the most recent revision dating from 2002. In 2013, a collective working group of more than 90 national experts initiated the updates for the seventh edition. The edition published in October 2015 comprises 400 pages, a substantial increase over the previous edition. The manual aims to be more precise by providing details on principles, including practical examples. It also seeks to better align relevant definitions with the changing nature of R&D, and specifically recognizes a shift away from a “linear model of innovation.”
One of the main features of the 2015 edition is its focus on describing and better assessing R&D in a business context, including R&D activities taking place outside of pure R&D teams. The newly revised edition reflects changes in the way R&D takes place and how it is funded, contains new chapters on the practical aspects of collecting R&D data in certain sectors and attempts to better align information on the human and financial resources dedicated to R&D.
National tax authorities worldwide likely will consider the concepts and definitions provided in the new version of the Frascati Manual. In addition to affecting statistics, the revised manual may affect national legislation, guidelines, or practices relating to R&D tax incentives in some countries.
Concepts and definitions for identifying R&D: Five core criteria
The global principles reflected in the new edition of the manual generally remain consistent with the previous editions. The main definitions of two of the three types of research (“basic research” and “applied research”) are retained, but some modifications have been made to the definition of “experimental development.” The general definition of R&D is as follows:
Research and experimental development (R&D) comprise creative and systematic work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of humankind man, culture and society, and the use of this stock of knowledge to devise new applications of available knowledge.
R&D is formally defined as an activity aimed at producing new knowledge, increasing the basic stock of knowledge, and serving as one type of innovation (innovation activities are described in the OECD Oslo Manual/2005.) R&D projects and activities must comply with this definition.
Chapter 2.4 of the manual sets out five core criteria that enable an activity to qualify as R&D:
- Novel: Aimed at new findings
- Creative: Not routine, based on original (not obvious) concepts and hypotheses
- Uncertain: Having uncertainty relating to the final outcome, timing, or performance
- Systematic: Planned and budgeted
- Transferable and/or reproducible: Leading to results that possibly could be reproduced
These criteria do not contradict the previous definition of R&D activities, but they appear intended to provide a more consistent interpretation of the definition. There is some room for differing interpretation of these criteria in a practical context, and observation over time will be required to assess the actual impact of the criteria.
Specific research fields: Increased focus on R&D for business enterprises
The manual supplements the R&D definition by providing an example of each type of R&D in several fields. The same examples apply regardless of whether the party carrying out the R&D is a public or private entity. While traditional scientific fields are described more precisely, new fields of R&D are introduced: research for and on the arts, social sciences, humanities, and traditional knowledge.
The new edition of the manual goes beyond the previous editions in its focus on the definition of R&D activities for business. Testing and activities involving pilot lines and prototypes remain eligible activities as long as scientific uncertainties are part of the project. When available, technology readiness levels may be used in a given field to simplify the classification of projects.
The new manual recognizes the globalization of R&D, as well as changes to R&D value chains; it acknowledges external contributors to a given R&D team and “extramural” R&D in the context of projects originated and performed outside a dedicated R&D team. The new manual also acknowledges the difficulty of classifying large-scale projects as R&D, for example, in fields such as “big data,” space, etc.
Many examples of basic research, applied research, and experimental development are provided in chapter 2.5, most of which appeared in the previous version. Technological advances appear to have been the triggering force for new sets of examples, such as those involving nanotechnologies, big data and the internet.
More precise kinds of projects also are listed. For example, in the field of computer and information sciences, research on the properties of general algorithms for handling large amounts of real-time data is considered to be basic research. As another example, in education, experimental development may be found in selected educational programs for children with specific needs.
As a result, to assess the R&D characteristics of a body of work or a given project, it is necessary to carry out a close examination by field, on a case by case basis, using the guidelines provided in the updated manual.
High-and-New Tech Enterprises (HNTE)
Companies that qualify for HNTE status are subject to a reduced enterprise income tax rate of 15 percent, rather than the standard 25 percent rate.
R&D expense super deduction
The Enterprise Income Tax (EIT) Law grants a generous super deduction for qualifying R&D expenses incurred by enterprises for the development of new technology, new products and new techniques. Qualifying companies are allowed to deduct 150 percent of R&D expenses actually incurred (i.e. an additional 50 percent deduction on top of the normal expense deduction) if the expenses do not result in the production of an intangible asset. If intangible assets are developed, companies can capitalize 150 percent of the actual costs incurred for amortization purposes.
To attract foreign investment and boost the local economy and government key performance indicator, many local government offices offer additional incentives to enterprises in the form of a percentage of the local contribution of tax paid (e.g. enterprise income tax, value added tax, business tax and individual income tax). The incentives are negotiated on a case-by-case basis and are available in specific situations (new business set up, increase of investment, etc.)
VAT exemption and enterprise income tax reduction for authorized technically advanced service enterprises in 21 pilot cities (available through 31 December 2018)
Authorized technically advanced service enterprises (i.e. qualified enterprises providing recognized offshore outsourcing services) may be entitled to a reduced enterprise income tax rate of 15 percent (rather than the normal statutory rate of 25 percent) and qualified offshore outsourcing service income may be exempt from VAT. Additionally, up to 8 percent of costs incurred for employee education expenses may be deducted.
VAT zero rate for export of R&D services or VAT exemption for export of technical services
- A zero rate (i.e. input VAT is deductible) is available for export R&D service income and a VAT exemption (i.e. input VAT is not deductible) is available for export technical service income
- To qualify, the company must be a VAT general taxpayer for purposes of the zero rate, it must contract with an overseas entity; and income received from the same overseas entity, etc.
Contact your China representatives
+86 21 6141 1488
+86 21 6141 1381
Public tender for research, experimental development, and innovation (TRIO)
The Ministry of Industry and Trade has announced a public tender for research, experimental development, and innovation under the TRIO program. To apply, a company must collaborate with at least one research institution. The program focuses on developing advanced technologies such as photonics, microelectronics, nano-electronics, nanotechnologies, and industrial biotechnologies.
Contact your Czech Republic representative
Partner, Tax and Legal in Central Europe
+420 606 654 304
Chemical industry, metal production industry, materials and ceramics industry, manufacturing
r+impulse—Innovative technologies for resource efficiency
This scheme focuses on the transfer of R&D results into innovation. Prototype and pilot projects in the following areas are eligible:
- Increase in material and energy efficiency (especially in high resource-consuming production processes)
- Recycling and substitution of economically strategic raw materials
- Further use of CO2 for chemical production and energy storage
Manufacturing, FMCG, ICT
Information and Communication Technology (ICT)-based service systems for innovative production processes and services
The program aims at R&D projects in the following areas:
- IT-supported and production-related service systems: Innovative approaches to the handling and use of data generated in and around production processes
- Logistics-related service systems: ICT supported interface management to allow for a smooth interplay of all product and process-related services in the logistics chain
- Data-related service systems: Technical support and approaches to allow for the provision of knowledge intensive services in connection with products and processes in the value chain
Medical technology, healthcare sector
SME-innovative: Medical technology
The program targets R&D activities in the medical technology field that strengthen SMEs in their efforts to transfer research technology to the health industry. Funding will be provided to both technological developments and preclinical studies. A SME must be the coordinator and the main beneficiary.
Contact your Germany representative
+49 (0) 40 32080 4910
+49 (0) 89 29036 7340
R&D Tax Incentive
From January 1, 2016, companies operating in Poland will be able to deduct enhanced amounts of certain R&D-related expenditures from their taxable base. Specifically, 130 percent of salary costs and social insurance costs of employees engaged in R&D activities and 110 percent (for large companies) or 120 percent (for SMEs) of other R&D-related expenditure will be able to be deducted. Qualifying expenses include the following:
- Costs of materials and supplies directly related to R&D activities
- Costs of expert opinions, advisory and equivalent services, as well as the costs of purchasing the results of R&D activities from a scientific institution
- Costs for the use of R&D infrastructure if used exclusively for R&D purposes and provided such use does not result from an agreement with an entity related to the taxpayer
- Depreciation of fixed and intangible assets used for R&D activities (with certain exceptions)
Costs related to basic research are eligible only if they are incurred under a contract or agreement with a research institution.
Companies may benefit from the tax incentive regardless of the type of R&D activities they are conducting and regardless of whether the R&D is successful. The deduction should be taken in the year the expense was incurred; however, any excess may be carried forward for three years.
This incentive also may be combined with grants for R&D projects.
Support for R&D activities aimed at the development of a pilot/ demonstration version of a new product (Sub-measure 1.1.2 of the Smart Growth Operational Program)
Administered by the National Centre for Research and Development (NCR&D), the program supports development activities carried out by enterprises that are related to the final phase of research projects leading to the creation of demonstration versions of new products. To benefit, a project must fall within the scope of one of the Research & Development and Incentive (R&D&I) funding priorities in the “National Smart Specialization.” Costs that are eligible for a grant include remuneration and outsourcing costs (up to 50 percent in the latter case), depreciation and leasing costs for R&D infrastructure and equipment, costs incurred on intangible assets, land and buildings, other operational costs and up to 17 percent of indirect costs. The enterprise must incur at least EUR 5 million in qualifying costs (large enterprises) and EUR 1.25 million (SMEs).
Support for investment in R&D infrastructure (Measure 2.1 of the Smart Growth Operational Program)
Administered by the Ministry of Economy, this grant program supports the set up and/or development of R&D infrastructure through investment in equipment, devices, technology and necessary appliances to carry out R&D to create innovative products and services. Key to obtaining support will be a research program with plans for, and the expected results of, R&D activities that will be carried out by the enterprise in the newly created or developed R&D center. Only enterprises qualify for the incentive. A minimum of EUR 0.5 million of eligible costs are required (this is based on the previous call for proposal and so may be subject of change).
Sectoral R&D projects (Measure 1.2 of the Smart Growth Operational Program)
Administered by the National Center for Research and Development (NCR&D), the program supports industrial research and experimental development or experimental development carried out by enterprises or consortia consisting of at least two entrepreneurs. Project must fall within the scope of one of the R&D&I funding priorities in the “National Smart Specialization” and must include R&D activities aimed at the production of basic products in the chemical industry (e.g. refined petroleum products, additives for fuels and mineral oils, fertilizers, plastics). Costs that are eligible for a grant include remuneration, costs of outsourcing (up to 50 percent), depreciation and the leasing of R&D infrastructure and equipment, costs incurred for intangible assets, land and buildings, other operational costs and up to 17 percent of indirect costs.
Contact your Poland representative
+48 881 950 969 or + 48 22 348 35 72
New Enterprise Zones announced
The UK government has announced 18 new enterprise zones and has extended eight zones, which together represent an area of 3,226 hectares.
Enterprise zones are designated areas throughout the country and many have a sectoral focus, particularly relating to the automotive, aerospace, renewable energy, and advanced manufacturing sectors. The new zones include the first agri-tech and advanced ceramics enterprise zones. The sites also offer simplified planning permission and support to access superfast broadband.
Contact your United Kingdom representative
+44 (0) 2920 264272
The Texas comptroller of public accounts has adopted a new rule to implement the sales and use tax exemption and franchise tax credit available for qualified R&D activities as defined under Internal Revenue Code section 41. Taxpayers that carry out qualifying activities have the option of claiming a sales tax exemption or a franchise tax credit to entities performing qualified R&D activities conducted in Texas.
The taxpayer can elect a sales tax exemption or the franchise tax credit for the same tax period, i.e. only one benefit may be selected.
California Competes Tax Credit—2nd Application Period
The California Competes Tax Credit (CCTC) is an income tax credit available to businesses that create or retain jobs in California. Since 2014, the governor’s Office of Business and Economic Development (GO-Biz) has awarded USD 223 million to 330 companies projected to create over 42,000 jobs and USD 9.6 billion in investments. For fiscal year 2015/2016, USD 43.7 of the USD 200.9 million available in tax credits was awarded to 89 companies in application period 1.
Contact your United States representative
+1 212 436 3703
For more information
For more information on any of the programs listed above, please contact the in-country representative or your usual contact.
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