EU report finds states could improve policies on R&D incentives, tax avoidance

By Doug Connolly, MNE Tax

The European Commission’s Annual Report on Taxation 2021, released May 18, finds that EU member states have made progress in bringing their tax policies in line with EU priorities, but areas for improvement remain, including with respect to incentivizing research and development (R&D) and tackling tax avoidance.

The report also highlights that most European corporate tax systems incentivize the acquisition of debt as opposed to equity for financing. The European Commission has recently identified this issue as an area it plans to address in its business tax agenda.

Business research and development investment in the EU is “on average, significantly lower than in large OECD countries,” according to the report. The EU would need to invest an additional EUR 110 billion (approximately $134 billion) per year to reach the Commission’s stated goal, which is for investment in research and innovation in the EU to equal three percent of GDP.

The report highlights several ways that R&D tax incentives could be made more effective.

While most member states have introduced measures to tackle aggressive tax planning, the report notes that “[f]igures still show financial flows coming from and going to certain Member States that are abnormally high relative to the size of the country’s GDP.”

The report states that this is indicative, although not determinative, of using a country for tax avoidance.