Research and Development Tax Credit Outside the U.S.

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The following dives into the Research and Development (R&D) Tax Credit in Italy, Canada, France and Australia.

R&D Tax Credit in Italy

The Finance Act for 2005 introduced in Italy the R&D tax credit regime. The possibility of taking advantage of this opportunity depends on the taxpayer’s fulfillment of certain conditions and on the actual availability of resources by the state.

Qualifying R&D expenditure for the purposes of the R&D tax credit includes: (i) costs for highly qualified personnel; (ii) depreciation on instruments and laboratory tools costing €2,000 (approximately $2,100 in USD) or more per item; (iii) costs for R&D activities outsourced to universities and public research centers or to other companies which reside in a EU member state or in a state party to the European Economic Area (EEA), or in a state allowing adequate exchange of information for tax purposes with Italy; and (iv) costs incurred for technical expertise related to industrial or biotech intellectual property.

It is to be noted that the R&D does not include any routine or regularly scheduled changes made to products, productions lines, manufacturing processes or existing services.

The tax credit will be available to any enterprise investing at least €30,000 (approximately $32,000 in USD) per year in R&D, irrespective of its legal form, industry, size and location, that bears one of more of the R&D costs mentioned above as from FY 2016 to FY 2020 and computed as a percentage of the total yearly R&D spending exceeding the average spending of the three tax year preceding FY 2015, ie. FY 2012, 2013 and 2014.

The credit percentage is 25% (50% from FY 2017 onwards) of the enterprise’s extra spending on the R&D expenditure incurred under ii) a iv) above, and 50% of the enterprise’s extra spending on the R&D expenditure incurred under i) a iii). The tax credit cannot exceed €5M (approximately $5.3M in USD) per year per each beneficiary (€20M, approximately $21.3M in USD, for FY 2017 onwards).

To be able to benefit from the relief, certain accounting documentation and other evidence (e.g. timesheets, contracts) must be certified by an audit firm, the company’s board of statutory auditors or by an independent individual registered auditor.

The R&D tax credit can be used to offset corporate income tax (IRES), regional tax (IRAP), VAT and social security contributions starting from the year following that during which expenses were incurred.

R&D Tax Credit in France

France actively supports companies to invest in R&D activities, mainly through the R&D tax credit. The R&D tax credit is equal to 30% of R&D expenses limited to €100M (approximately $106.6M in USD). Where the amount of R&D expenses exceeds €100M, the tax credit is limited to 5% of the excess expenses.

The R&D tax credit can be used to offset Corporate Income tax. To the extent the credit is not utilized within three-year period, the company is entitled to a refund. However, Small and Medium-sized Enterprises (ie. companies with less than 250 employees and revenue of less than €50M, approximately $53.3M in USD) or Young Innovative Companies (ie. small or medium enterprises which have less than 250 employees and either an annual turnover not exceeding €50M or a balance sheet of not more than €43M (approximately $45.8M in USD), performing R&D projects and satisfying some specific conditions) may immediately obtain a reimbursement in cash. If the company does not want to wait three years to obtain a reimbursement, it is possible to transfer the R&D tax credit receivable to a bank. The bank will pay in cash the company and the bank, after three years will ask for a reimbursement.

The tax credit will be available to any enterprise irrespective of its legal form, industry, size and location, that conducts one of more of the qualified activity (ie. basic research, applied research, and development activities).

Eligible expenses include inter alia R&D staff salaries, general and administrative expenses, depreciation on assets used for R&D activities, patent costs, contract research cost. Please note that this list is not exhaustive.

R&D Tax Credit in Australia

On September 16, 2016, the Budget Savings (Omnibus) Act 2016, which reduced the rates available under the R&D tax incentives, received Royal Assent.

The R&D tax credit is the primary mechanism by which the Commonwealth seeks to encourage companies to undertake R&D activities in Australia.

A company can only claim an R&D tax offset if it is an R&D entity. Company is an R&D entity if it is a corporation that is any of the following:

  • incorporated under an Australian law;
  • incorporated under a foreign law but an Australian resident for income tax purposes;
  • incorporated under a foreign law and it is both:
    • a resident of a country with which Australia has a double tax agreement that includes a definition of ‘permanent establishment’; and
    • carrying on business in Australia through a permanent establishment as defined in the double tax agreement.

Special rules apply for a partner in an R&D partnership. An R&D partnership is one where each partner meets the definition of an R&D entity. The partnership itself is not eligible to claim the R&D tax incentive for the R&D activities it undertakes because it is not an R&D entity. However, the partners may be able to claim for R&D activities the partnership has undertaken.

Special rules also apply for a member of a consolidated group or a multiple entry consolidated (MEC) group. In this case, only the head company of the group should claim the incentive for the R&D activities conducted out by the single entities.

Eligible entities with annual turnover of less than $20M (approximately $15.2M in USD) and which are not controlled (>50%) by exempt entities may obtain a refundable tax offset equal to 43.5% of their first $100M (approximately $75.8M in USD) of eligible R&D expenditure in an income year and a further refundable tax offset equal to the amount by which their R&D expenditure exceeds $100M multiplied by the company rate. Small companies that report the tax credit cannot deduct the qualifying expenditure included in calculating the tax credit.

All other eligible entities may obtain a non-refundable tax offset equal to 38.5% of their R&D expenditure and a further non-refundable tax offset equal to the amount by which R&D expenditure exceeds $100M multiplied by the company tax rate.

Qualifying expenditure may include staff costs, direct costs, overhead, supplies, tax depreciation and certain capital expenditure on activities that are classified as either core R&D activities or supporting R&D activities.

R&D Tax Credit in Canada

Canada encourages Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada, mainly through the Scientific Research and Experimental Development (SR&ED) Program.

Generally, a Canadian-controlled private corporation (CCPC) can earn a refundable SR&ED tax credit at the enhanced rate of 35% on qualified SR&ED expenditures, up to a maximum threshold of $3M (approximately $2.3M in USD), ie. expenditure limit. This 35% SR&ED tax credit is 100% refundable on qualified SR&ED expenditures. It is to noted that the SR&ED Program does not offer refunds to foreign controlled or public companies.

A CCPC can also earn a non-refundable SR&ED tax credit at the basic rate of 15% on an amount over the $3M threshold.

A CCPC that meets the definition of a qualifying corporation can earn a refundable SR&ED tax credit at the basic rate of 15% on an amount over the $3M (approximately $2.3M in USD) threshold, of which 40% can be refunded.

Other corporations can earn a non-refundable SR&ED tax credit at the basic rate of 15% on qualified SR&ED expenditures. The SR&ED tax credit can be applied to reduce tax payable.

Individuals (proprietorships) and trusts can earn a refundable SR&ED tax credit at the basic rate of 15% on qualified SR&ED expenditures.

Since a partnership is not a taxpayer, it cannot earn an SR&ED tax credit. In general, the SR&ED tax credit is calculated at the partnership level then allocated to eligible members (individuals, corporations, or trusts), but not necessarily to all members.

To qualify, the work must meet the definition of scientific research and experimental development (SR&ED) in subsection 248(1) of the Income Tax Act.

Taxpayers must be prepared to support their claims with documentation and other technical and financial evidence of activities and expenditures qualified as SR&ED for tax purposes.

Ask the Experts

Federico Giordano
Tax Secondee Partner from HLB Italy
T (646) 239 5473
fgiordano@withum.com

kphelan@withum.com

To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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