INDIRECT SCHEMES & MEASURES for SUPPORTING RTD

An International Compendium of Indirect Schemes and Measures for Supporting Research and Technological Development in Enterprises, European Commission DG XII European Technology Assessment Network. Version of 15th August 1999

Version of 18-Aug-99

An International Compendium of

INDIRECT SCHEMES & MEASURES for SUPPORTING RTD

in Enterprises

A supplementary report on the ETAN activity on the Promotion of Employment in R&D in Enterprises

This report is based on an annex to a report on the same subject by Segal Quince Wicksteed Limited, economic and management consultants, November 1995 and then maintained by DGXII of the European Commission throughout the ETAN action on Indirect Measures to promote RTD employment in Enterprises, unless the sources of individual contributions are specifically noted, up to 1.6.99.

This report is also available on the Internet, at URL http://www.cordis.lu/etan/src/topic-7.htm

under the section “Reports”, as of 1st October 1999.

DETAILS OF SCHEMES

This volume on indirect schemes and mechanisms for supporting RTD in companies presents details of a number of indirect schemes and measures which have been implemented over the last ten years, and came to be review in the context of the European Technology Assessment Network exercise on this issue.

The case studies are presented in the same taxonomy as they appear in the main ETAN report. The first section examines European Union Member States tax-based measures, the second, financial support measures for personnel and equipment and in the third, some “other” measures are detailed.

Within each section the more relevant schemes are presented first, followed by the summaries of other schemes which were not researched in any detail. A further section then reviews schemes outside of the structure of the European Union 15 member states.

Unless otherwise stated, all figures are in current terms, and have been converted to ECU or EUROs (€) using the exchange rates current at that time.

PART IV
INDIRECT SCHEMES AND MEASURES IN COUNTRIES
EXTERNAL TO THE EU

45. AUSTRALIA

50% Tax Concession (validated by A Gambardella, J Guinet and L Rubiello)

The 150% tax concession for R&D is the principal scheme, which has existed now for nine years. There is a full review in a report (12/94) covering the whole Australian R&D scene. In 92/93 BERD/GDP was up to 0.67% (from 0.25% in FY 81/82). Over the last two years R&D investment has grown by double digit percentage points. Two thousand seven hundred organisations perform R&D (up from 1300 in FY81/82. Amongst G-24, Australia is 19th, and despite success of the scheme, is still 17th in OECD terms - the same as in FY 81/82. Growth rate though is 2nd highest. Corporate Tax rate is 33%. A 200% tax concession rate was seriously considered. Currently, with concessions, A$1 of R&D costs 50.5 cents only. Tax concession has a floor of 20K A$. The rules are:

Objective of the R&D tax concession is to make Australian companies more innovative and internationally competitive through:

A increasing companies' investment in R&D;

B encouraging better use of Australia's existing research infrastructure;

C improving conditions for the commercialisation of new process and product technologies developed by Australian companies; and

D developing a greater capacity for the adoption of foreign technology.

The benefit is a tax concession that enables eligible companies to deduct 150 per cent of eligible expenditure incurred on R&D activities against their taxable income. The concession is for companies incorporated in Australia; public trading trusts; eligible companies in partnership.

What expenditure is eligible? - expenditure on R&D projects that involve either innovation or technical risk. Associated requirements are that the R&D must (generally) be carried out in Australia; it must have adequate Australian content; and the results must be exploited for the benefit of Australia.

Number of registrants - approximately 2500 per year, steady since 1990.

Tax revenue forgone - A$ 395 million (1992-93); A$415 million (1993-94 est).

Changes were announced in May 1994 in the Government White Paper:

· expenditure threshold reduced from $50,000 to $20,000 to get more SMEs involved;

· specific R&D activities carried on outside Australia allowed as eligible on a discretionary basis up to a limit of 10 per cent of total project cost;

· syndicated R&D expenditure threshold reduced from $1 million to $500,000; and a generic structure to be developed.

The definition of R&D is defined in:

Subsection 73B(1) of the Australian Income Tax Assessment Act defines R&D in two parts:

"Research and development activities" means:

(a) systematic, investigative or experimental activities (i.e. core activities) that:

1) are carried on in Australia or in an external Territory;

2) involve innovation or technical risk; and

3) are carried on for the purpose;

(i) of acquiring new knowledge (whether or not that knowledge will have specific practical application)

(ii) creating new or improved materials, products, devices, processes or services; or

(b) other activities (i.e. supporting activities) that:

1) are carried on in Australia or in and external Territory; and

2) are carried on for a purpose directly related to the carrying on of activities of the kind referred to in paragraph (a).

The syndicated approach works well - users tax credits that companies can "sell" and share benefits. Social benefits are greater in this way. However the multiplier effect is ca. 0.7 to 1.0; with social benefits though the multiplier is > 1.0.

Contracted R&D is permitted. But no major change in the scheme is foreseen as a result. It has improved Australian competitively and innovation. Concessions will remain in foreseeable future.

The scheme costs, annually, 455 MA$/Yr. (FY93). Proof of its success are not empirically certain but R&D has improved. The administration aspects are summarised thus:

· The tax concession is jointly administered by the Industrial R&D Board and the Australian Taxation Office.

· The legal framework for the concession spans the Income Tax Assessment Act and the Industry Research and Development Act.

The Commissioner for Taxation has responsibility for deciding the eligibility of the amounts claimed.

The Board, through its Tax Concession Committee, is responsible for deciding the eligibility of:

· the activities claimed as R&D

· the financial structures of R&D syndicates

· R&D conducted overseas (from 1 July) within thresholds.

The board is also responsible for:

· registrations

· monitoring

· reviews and appeals.

The scale of support is still focused on small companies, but is the big companies who really benefit from the scheme.

Table A1 shows that despite a doubling of BERD, the average scale of R&D in enterprises remains small, in the 1 to 10 people FTEs.

Overall, small enterprises (<100 KA$/annum of R&D) are 40% of all applicants and consume just 3.7% of the funding. Medium sized R&D undertakings also account for 42% of applicants but consume 16.7% of funding. Large enterprises in the sense of total R&D spend (> 500 KA$/year R&D) are 18% of all applicants but they obtain 79.7% of the funds available. The largest companies (13 applicants consume 27.7% of all funds). Table A-2 shows the skewed distribution, and confirms that 63% of all R&D expenditure is eligible for the scheme.

Table A1: Australian BERD and Number of Organisations taking part in R&D actions

Year / BERD
MillA$ / BERD as
% GDP / R&D
FTEs / Org’s / FTEs/
Org
FY86 / 1289 / 0,48 / 18479 / 3029 / 6
FY88 / 1798 / 0,54 / 20803 / 3048 / 7
FY90 / 2082 / 0,54 / 20907 / 2685 / 8
FY91 / 2320 / 0,59 / 21066 / 2398 / 9
FY92 / 2788 / 0,67 / 22811 / 2766 / 8

Table A2: Scale of R&D in Australian Companies benefiting from Tax Allowances

R&D Exp
KA$s per
annum / No. of
Companies
Registered / % of all
Registrants / Cumulative
% of all
Registrants / % of R&D
costs
allowed / Cumulative
% of all
costs
1-20 / 120 / 5,96% / 5,96% / 0,1 / 0,10
20-49 / 247 / 12,26% / 18,22% / 0,8 / 0,90
50-99 / 438 / 21,75% / 39,97% / 2,8 / 3,70
100-199 / 445 / 22,10% / 62,07% / 5,5 / 9,20
200-500 / 403 / 20,01% / 82,08% / 11,2 / 20,40
500-999 / 168 / 8,34% / 90,42% / 10,1 / 30,50
1000-1999 / 86 / 4,27% / 94,69% / 10,7 / 41,20
2000-4999 / 77 / 3,82% / 98,51% / 20,8 / 62,00
5000-9999 / 17 / 0,84% / 99,35% / 10,4 / 72,40
>10000 / 13 / 0,65% / 100,00% / 27,6 / 100,00
Total 2014 / BERD88/9
% Eligible / 1137,3 MA$
1798 MA$
63%

The Australian Experience in Evaluating the R&D Tax Concession.

Introduction to the Australian 150% Tax Scheme

This paper presents the Bureau of Industry Economics' experience in evaluating the Australian 150% R&D Tax Concession. The principal source is the Bureau's Research Report 50, “R&D, Innovation and Competitiveness: An Evaluation of the Research and Development Tax Concession”.

The introduction of the R&D Tax Concession scheme in 1985 coincided with a major shift in Australian industrial policy away from protectionism and toward greater openness and integration with the global economy. The Concession was seen as an important instrument in reorienting Australian firms and in changing the attitudes and priorities of management towards innovation.

The main goals of this policy have been to increase business expenditure on R&D, to improve the effectiveness of the R&D undertaken by public research agencies such as the CSIRO, and to improve the linkages between universities and industry. The Concession, therefore, is only one of a suite of policies designed to achieve these goals - albeit one of the most important in terms of the cost to Government.

The Changing Policy Environment

The late 1970s and early 1980s were the end of an era in Australian industry policy. Industry was increasingly seen as overly protected from international pressures. Foreign ownership was high, reflecting the trade barriers erected over the post-war period. The BERD/GDP ratio was low by international standards and dropping. Australia's fortunes were tied to natural resource industries - precisely those whose terms of trade had displayed a worryingly persistent secular decline over the past 40 years. Manufacturing appeared in a state of irreversible decline.

Policy initiatives over the 1980s, following in part a world-wide trend for opening up markets, saw the emasculation of traditional protectionist policies and a move towards policies which addressed market failures, firm inefficiencies and impediments to firms operating effectively. Science and technology (S&T) policies have figured prominently ever since in industry policy agenda in Australia. There is a broad acceptance of the view that a priority issue for Australia is to increase the competitiveness of the economy in order to halt and reverse the fall in Australia's world ranking in terms of per capita GDP.

From the mid 1980s onwards the basic goals of policy have been to increase BERD/GDP through the 150% Tax Concession and assorted Grant programs; increase effectiveness of public sector R&D by setting commercial objectives for CSIRO and other public sector research agencies and improving the overall functioning of the innovation system by encouraging the development of university-industry links especially through the Cooperative Research Centres program.

Government policy statements have continually stressed the significance of science and technology to Australia's economic development. R&D is seen as a central element in the process of technological innovation through its role in developing new and improved products and processes.

The impetus for innovation policy is now motivated by more than just a simple linear view of the innovation process. There is a recognition of the importance of networking linkages and feedback mechanisms. The motivations behind policy initiatives and the initiatives themselves are therefore in a continual state of evolution.

Trends in total and business R&D

Over the period of the 1970s and early 1980s, Australian R&D performance differed in two major respects from that of many other OECD countries: first, the ratio of gross expenditure on R&D (GERD) to GDP was low, compared to both the OECD average and other similar-sized R&D performing countries; and second, the ratio had been declining during most of the 1970s, in stark contrast to the generally upward trend in most other OECD countries.

Despite above-average growth in GERD during the 1980s (particularly since 1985-86) Australia's international R&D ranking has not really changed from 1981 to 1992. Australia's GERD/GDP ratio is 0.45 percentage points lower than the average for this group of industrial economies.

A key feature of Australian R&D experience is the dominance of the Government sector, at times accounting for as much as three-quarters of overall funding. Internationally, Australia's performance on public R&D is good -- Australia ranks eighth among a group of 28 OECD and other industrial economies in terms of Government funded R&D to GDP. It is the low business R&D to GDP ratio which makes Australia a relatively poor performer on overall R&D.

The dominance of publicly funded R&D has implications for the type of R&D undertaken. The public sector (Government agencies and universities) perform

around 60% of Australia's R&D, and the bulk of this (around 85%) is concentrated in the research rather than the development stage. By contrast, two-thirds of business R&D expenditure is directed at product development, but this represents only one-quarter of overall R&D expenditure. The major part of Australia's R&D effort therefore tends to be concentrated in the early stages -- the research stage dominates the development stage in the ratio of 2:1. Because of this feature Australia is relatively strong in the research phase of the innovation process, it is relatively weak in commercialising the results of that research[1] .

The last two decades have been marked by several episodes of substantial swings in business expenditure on R&D (BERD)[2]. Australian BERD to GDP grew at an average annual rate of over 15% over the period 1981 to 1989 - the fastest growth exhibited by any OECD country, but the current Australian BERD/GDP ratio is still relatively low - about two thirds the median figure for other medium R&D performing countries and about three quarters of the average for a group of G-28.