US support for R&D has stalled relative to France, UK, others

By Doug Connolly, MNE Tax

While several countries have significantly boosted their support for business research and development (R&D) relative to their overall economies in recent years, total US government support for business R&D as a percentage of GDP has slightly decreased. On the whole, US support as a percentage of GDP remains slightly above average among OECD countries. Still, it is losing ground, as support in general among OECD countries has trended upwards, according to OECD R&D incentives country profiles released on April 8.

Relative to other leading economies, the US also disproportionately relies on direct funding rather than tax incentives to support business R&D. In the US, tax incentives account for only 38 percent of total government support for business R&D. By contrast, tax incentives accounted for 76 percent of business R&D support in Canada, 55 percent in China, 71 percent in France, 84 percent in Japan, and 76 percent in the UK.

The US corporate tax plan introduced by President Biden proposes freeing up revenue for expanded R&D incentives by repealing the foreign-derived intangible income (FDII) provisions. However, the Administration has not yet provided further details on how specifically it would enhance the R&D incentives.

Biden’s infrastructure plan – which accompanied, and is proposed to be paid for by, the corporate tax plan – would also include new direct investment in R&D.

France and UK boost R&D support relative to US and others

While the US provides the largest support of business R&D in absolute terms, US government support measured as a percentage of GDP was only slightly above average at 0.21 percent in 2016 (the latest data available). On average, OECD countries spent about 0.19 percent of GDP to support business R&D.

In addition, US support has trended downwards in recent years, with US business R&D support decreasing 0.02 percentage points from 2006–2016. Meanwhile the OECD average increased 0.03 percentage points from 2006–2018.

France provided the highest level of government support for business R&D as a percentage of GDP at 0.40 percent in 2017 – more than double the OECD average. This followed a significant increase in business R&D support of 0.17 percentage points from 2006–2017.

France provided the highest level of government support for business R&D as a percentage of GDP at 0.40 percent in 2017 – more than double the OECD average. This followed a significant increase in business R&D support of 0.17 percentage points from 2006–2017.

The UK is also near the front of the pack, providing support for business R&D at 0.33 percent of GDP. The UK has also been boosting R&D support in recent years, with a 0.07 percentage point increase from 2014–2018. In addition, the UK launched a review this year into how it can further enhance its R&D incentives.

Other countries spending big on business R&D support include Russia (0.40 percent of GDP), South Korea (0.29 percent), and Austria (0.27 percent).

Other leading Asian economies have generally provided less support. China provided R&D support at a level 0.13 percent in 2017, Japan at 0.14 percent. However, China has recently boosted its incentives with an enhanced R&D super deduction.

Italy and Canada are about on par with the US in terms of R&D business support at levels of 0.23 percent and 0.22 percent of GDP, respectively.

Tax incentives versus direct funding

The US continues to skew towards direct funding rather than tax incentives to support business R&D, although the importance of R&D tax incentives has increased in recent years. US R&D tax incentives as a percentage of total support fell from 29 percent in 2000 to just 16 percent in 2009 before steadily increasing to 38 percent in 2016.

The jump in R&D support in recent years in France and the UK has generally come in the form of increased tax incentives. In the UK, tax incentives as a percentage of total R&D support increased from 39 percent in 2006 to 76 percent in 2018. In France, the share of R&D support in the form of tax incentives increased from 22 percent in 2000 to 71 percent in 2017.