Ireland, Lithuania, Hungary offer lowest tax rates for R&D, OECD study finds

By Doug Connolly, MNE Tax

An OECD taxation working paper on corporate effective tax rates for research and development (R&D) released on July 29 reports that the effective average tax rate on R&D investments in Ireland, Lithuania, and Hungary range from -2% to -4% – suggesting the granting of tax subsidies for certain R&D investments in these countries.

The OECD study looks at how R&D tax incentives impact the effective average tax rates of large, profitable companies. The effective tax rate estimates in the study are based on 2019 data and cover 48 countries, including all OECD and EU countries, as well as Argentina, Brazil, China, Russia, South Africa, and Thailand.

The average effective tax rate for R&D investments among the countries in the study that offered tax incentives was 12.5%, but the rates ranged from a maximum of 25.92% to a minimum of -3.75%. The highest effective average tax rates for R&D investments in the studied countries were in Australia, Mexico, and South Korea.

The results indicate that on average R&D tax incentives reduce the effective average tax rate of companies by 8.8 percentage points in OECD countries. The largest reduction in the effective average tax rate for R&D investments (compared to non-R&D investments within the same country) was granted in the Slovak Republic – a 19.4% reduction – followed by Thailand and France. The lowest reductions were granted in Denmark and Israel.

Of the 48 countries reviewed, eight did not offer R&D tax incentives in the year studied: Argentina, Bulgaria, Cyprus, Estonia, Finland, Germany, Latvia, Luxembourg, and Switzerland.

R&D tax incentives increasing globally

The OECD’s Corporate Tax Statistics report, released concurrently with the R&D working paper, notes that there has been a shift towards more intensive use of R&D tax incentives relative to direct funding support in recent years – with tax incentives increasing from 36% to 56% of total support from 2006 to 2018.

Moreover, total support for R&D via both tax expenditures and direct funding has also increased in 30 of the 48 jurisdictions. France, Russia, and the UK provided the largest levels of total R&D support as a percentage of GDP in 2018.

Five reviewed countries provided direct R&D support but no tax incentives: Estonia, Finland, Germany, Luxembourg, and Switzerland. Another five relied mostly – although not exclusively (more than 80%) – on tax incentives for supporting R&D: Australia, Colombia, Italy, Japan, and Portugal.