A comparison of tax credits and tax allowances
stimulating research and development
Abstract:
In this paper tax credits and tax allowances are compared with regard to their effectiveness in stimulating research and development. To study the effect of tax credits and tax allowances on research and development, this paper studied the results of three factors representing research and development in 18 countries using a tax allowance or a tax credit. These three factors are: The B-index, the percentage of gross domestic product spent on a tax incentive and the number of patents and trademarks produced per million of inhabitants per year in countries using tax credits and countries using tax allowances. This paper concludes that research and development can be best stimulated by tax credits.
Master thesis R.O.F. Bakker s1882309
Table of contents:
Introduction p. 5
1. Definition of research and development p. 8
1.1. Research and development p. 8
1.1.1. Basic research p. 9
1.1.2. Applied research p. 10
1.1.3. Experimental development p. 11
1.1.4. Activities not included in research and development p. 11
1.2. Summary p. 12
2. Definition and explanation of tax incentives, tax credits and tax allowances p. 14
2.1. Definition of tax incentive p. 14
2.2. Different kind of tax incentives p. 15
2.3. Explanation on tax incentives lowering the taxable object or tax payable p. 16
2.3.1. Costs allowed for tax incentives p. 17
2.3.2. Total volume or incremental based tax incentive p. 17 2.3.2.1. Advantages and disadvantages of volume and incremental based tax incentive p. 19 2.3.3. Other important subjects regarding tax incentives lowering the taxable object or
tax payable p. 20
2.4. The difference between tax allowances and tax credits p. 21
2.5. Summary p. 22
2.5.1. Definition of tax incentive p. 22
2.5.2. Different kind of tax incentives p. 22
2.5.3. Explanation on tax incentives lowering the taxable object or tax payable p. 22 2.5.4. The difference between tax allowances and tax credits p. 23 3. Proof of tax incentives influencing research and development p. 25 3.1. Theoretical evidence of tax incentives influencing research and development p. 25
3.1.1. Research and development as a public good p. 25
3.1.2. Theoretical Evidence of tax incentives outperforming direct government
3.1.3. Theoretical arguments regarding the effect of different kinds of tax incentives p. 28 3.2. Empirical evidence of tax incentives influencing research and development p. 29 3.2.1. Empirical evidence on the effect of tax incentives on research and development p. 29 3.2.2 Empirical evidence of tax incentives stimulating research and development
better than direct government support p. 31
3.3. Summary p. 32
4. Outline of the research p. 34
4.1. Selected tax incentives from different countries p. 34
4.1.1. Selected tax credits p. 35
4.1.2. Selected tax allowances p. 37
4.2. Factors measured p. 39
4.2.1. One minus the B-index p. 40
4.2.2. Percentage of gross domestic product spend on tax incentive p. 40 4.2.3. Patents and trademarks produced per million of inhabitants p. 41
4.3. Restrictions of the research p. 42
4.4. Summary p. 44
4.4.1. Selected tax incentives from different countries p. 44
4.4.2. Factors measured p. 45
4.4.3. Restrictions of the research p. 46
5. Results p. 47
5.1. One minus the B-index p. 47
5.1.1. One minus the B-index on tax credits p. 47
5.1.2. One minus the B-index on tax allowances p. 48
5.1.3. Comparison between tax credits and tax allowances on the B-index p. 49
5.2. The percentage of gross domestic product p. 50
5.2.1. The percentage of gross domestic product spend on tax credits p. 50 5.2.2. The percentage of gross domestic product spend on tax allowances p. 51 5.2.3. Comparison between tax credits and tax allowances on the percentage of gross
domestic product spend p. 52
5.3. Number of patents and trademarks produced per million of inhabitants p. 52 5.3.1. Number of patents and trademarks produced per million of inhabitants trough
5.3.2. Number of patents and trademarks produced per million of inhabitants trough
tax allowances p. 54
5.3.3. Comparison between tax credits and tax allowances on the number of patents
and trademarks produced per million of inhabitants p. 55
6. Conclusion p. 57
References p. 60
Appendix A p. 64
Introduction
The European Union, in her plans to improve Europe, aims at increasing the total level of innovation by the year of 2020 for her 10 year strategy. In the paper: State of the Innovation Union (2011) increasing innovation is regarded as the most important measure in making Europe more robust to the crisis, increase the total level of employment and increase
economic growth in the European sector. The paper (European Union 2011) found that there is a connection between the amount of research and development produced in a country and the growth in the gross domestic product of a country. Increasing the overall level of research and development in a country also increases the total level of gross domestic product growth. One of the most important objectives of the Innovation Union is the stimulation of national and regional measures to stimulate research and development. The stimulation of research and development by governments can be done in several ways. The two most important ways to stimulate research and development are: Direct government support (subsidies) and indirect government support (tax incentives). For example, with respect to direct government support Bloom et all. (2002) found that a reduction in the costs of research and development through a tax incentive of 10%, would lead to an increase in the overall level of research and
development of 1% in the short run and almost 10% in the long run. Czarnitzki et all. (2007) found in a study of Finnish and German firms, that especially Finnish firms which currently receive subsidies would perform worse without this government support. Firms that are currently operating without government support could increase their research and
development output by gaining government support according to Czarnitzki et all. (2007). Others have studied both direct government support and indirect government support and tried to find out which type of government support stimulates research and development the best. Hægeland and Møen (2007) found that for Norway the tax credit produces for every kroner paid by the public sector 2.86 kroner of private intramural research and development. And every kroner paid by the public sector by means of subsidy creates only 2.07 kroner spent on research and development. Ientile and Mairesse (2009) may provide a possible answer to this phenomena. They stated that one of the great advantages of indirect government support, as supposed to direct government support, is that enterprises are not influenced by the fact that the government chooses which projects are eligible for subsidizing and which projects are not. In other words the market chooses which research and
development the best. This brings up the question: Which type of tax incentive stimulates research and development the best? This paper discusses two types of tax incentives: tax credits and tax allowances. It must be mentioned that the terms tax incentive, tax credit and tax allowance are sometimes used as substitutes in literature. The difference between tax allowances and tax credits, can be explained as followed: tax credits lower the tax amount and tax allowances lower the taxable amount. Finding out which type of tax incentive stimulates research and development the best is the next step in formulating the right instrument of government support. Some theoretical arguments between different types of tax incentives already have been discussed. For example Zee et all. (2006) stated that tax allowances work better to stimulate specific types of investments than tax facilities focusing on lower corporate income tax rates. Moreover the loss of tax revenue can be much better controlled by
governments trough tax allowances. Up until the time of writing this thesis, no one tried to explain which type of tax facility performs the best in stimulating input and output factors of research and development. Comparing all kinds of tax incentives in stimulating input and output factors of research and development is to elaborate for this paper. Therefore this paper only focuses on two types of tax facilities: tax credits and tax allowances. The main issue discussed in this paper is: Do tax credits or tax allowances stimulate research and
development the best? Therefore the hypothesis of this paper is:
Tax credits stimulate research and development better than tax allowances.
In order to find out which type of tax incentives stimulate research and development the best, three factors of research and development will be discussed: The B-index, the percentage of gross domestic product spent on a tax incentive and the number of patents and trademarks produced per million of persons. The B-index describes the research and development cost reduction generated by tax incentives. The percentage of gross domestic product spent analyzes the total level of research and development that is produced with regard to the tax incentive. The patents and trademarks show the level of successful research and development produced in countries with a certain tax incentive.
research and development as discussed in the Frascati Manual1 (OECD 2002) will be used. Chapter two elaborates on the definition of tax incentives, the types of tax incentives available and structuring tax incentives. Moreover the difference between the terms tax credits and tax allowances will be discussed. The purpose of Chapter two is to prevent misunderstandings about terminology. In contrast to the term regarding research and development, no uniform definition regarding the term tax incentives exists. The structure of tax incentives for
countries is discussed in appendix A in order to prevent chapter two becomes a listing of tax incentives. Chapter three focuses on a review of the available literature concerning the
stimulation of research and development through tax incentives. First the theoretical literature will be discussed on tax incentives stimulating research and development, followed by an overview of the empirical literature in order to review the available literature and set the starting point of this research. The theoretical and empirical literature concerning tax incentives stimulating research and development better than subsidies will be discussed as well. Chapter four discusses the outline of the entire research. Nine countries using tax credits and nine countries using tax allowances are discussed. For example The Netherlands is not included as this country uses multiple tax incentives, which does not allow to determine the effect of just a tax credit or just a tax allowance. Next to that, three factors studied which ought to represent an increase in research and development are discussed. The flaws of these factors will be discussed here too. Finally, this chapter discusses every characteristic that is important for a tax incentive to be effective in stimulating research and development. The last chapter, chapter 5, will discuss the results of tax credits and tax allowances with regard to the three factors discussed. First the results of tax credits will be discussed, followed by the results of tax allowances. Finally the two results will be compared. For readers who do not wish to read every chapter, chapters 1 till 4 contain a summary.
1 The Frascati Manual can be considered as the leading article of the OECD on defining research and
1. Definition of research and development
In this chapter the focus lies on the definition of the terms used to research our problem statement. The key essential is research and development. As will be argued in this chapter, for further research this paper will refer to research and development as the definition used by the Frascati Manual (OECD 2002) in order to be in line with most other papers discussing the benefits of tax incentives.
1.1. Research and development
One of the most important definitions of research and development is given by the Frascati Manual (OECD 2002):
’Research and experimental development should comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications.’
One should notice that this definition talks about research and experimental development. It is not clear if any meaning can be imputed to the word experimental in the definition. Nowadays almost every research paper uses the Frascati Manual as standard definition for research and development (OECD 2002).Approximately 10 to 15 years ago there were several definitions of research and development. For example the Australian Bureau of Statistics (ABS)(1996) used technical risk in the definition of research and development. Although technical risk is not part of the definition by the Frascati Manual (OECD 2002), this does not mean that the definition of ABS is not repeated. For example the definition of the Australian Department of Industry, Science and Tourism (DIST) also included technical risk (DIST 1998) and it also included carrying out activities that are directly related with the goals of research and development activities. For further clarity, the activities, mentioned by DIST (1998) above, only classify as research and development activities when there is a large enough element of innovation.
(UNESCO 1984): scientific research and experimental development, where scientific research was divided into fundamental (basic) research and applied research.
The OECD (2002) argues that four activities are excluded from this definition. Although these activities do have technological and scientific characteristics, they can not be defined as research and development. These four activities are: Education and training, other related scientific and technological activities, other industrial activities and administration and other supporting activities. First I will discuss the three activities covered by research and development, basic research, applied research and experimental development, followed by the activities that are not covered by research and development.
1.1.1. Basic research
Basic research can be defined as followed (UNESCO 1984):
‘Fundamental (or basic) research can be defined as any experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular or specific application or use in view.’
1.1.2. Applied research
Applied research is the other half of scientific research according to the UNESCO (1984) report. Therefore one must bear in mind that the same four essential elements that apply to scientific research, the elements of creativity, novelty, the use of scientific methods and generating new knowledge, also have to apply in order to qualify as applied research. Applied research can be defined as follows (UNESCO 1984):
‘Applied research is also original investigation undertaken in order to acquire new
knowledge. It is, however, directed primarily towards a specific practical aim or objective.’
So the most essential criterion for applied research is: trying to increase the stock of knowledge in order to solve a specific practical problem. The key element of both the definitions of basic research and applied research, and therefore of scientific research as a whole, is the acquiring of new knowledge, in a theoretical or practical manner. The most important difference between basic research and applied research is the presence of a practical aim or objective. Basic research is more focused on analyzing different phenomena, where applied research focuses on answering different scientific problems. Stokes (1997) made a variant of the Pasteur’s Quadrant for scientific research, explaining that if the research is focused on the considerations of use and not focused on a quest for fundamental
understanding, the research is defined as applied research. However despite the fact that both Stokes (1997) and the UNESCO (1984) use the goal of the research in order to differentiate between basic research and applied research, this does not mean that this way of
differentiating is appropriate. Furlong and Oancea (2005) argue that these definitions
1.1.3. Experimental development
The third activity defined by the OECD (2002) as a part of research and development is experimental development. Experimental development can be defined as followed (UNESCO 1984):
‘Experimental development can be defined as any systematic work, drawing on existing knowledge gained from research and/or practical experience that is directed to producing new materials, products and devices, to installing new processes, systems and services, and to improving substantially those already produced or installed.’
Where both applied research and basic research aim at increasing the stock of knowledge, experimental development focuses more on the implementation of these new stocks of knowledge in order to create or improve products and production processes. In this case experimental development follows from research. In order to develop new products one first has to own new sources of knowledge.
1.1.4. Activities not included in research and development
The Frascati Manual (OECD 2002) identifies four types of activities which especially should not be labelled as research and development: Education and training, other related scientific and technological activities, other industrial activities and administration and other supporting activities. Education and training includes all forms of training and teaching of personnel and students with the exemption of PhD students. Other related scientific and technological activities include amongst others collecting, coding and translating done by scientific personnel, bibliographic services and patent services. Following other industrial activities includes: Other innovation activities and production and related technical activities. In the Oslo Manual (2005) other innovation activities are divided between activities such as market research and manufacturing start-up, and activities that partly can be marked as research and development activities, like making prototypes or develop processes. The last type of activity that is not marked as research and development, administration and other supporting
an end. For example, in the education and training sector, PhD students perform serious research activities in combination with activities that skill their research qualities. The Frascati Manual (OECD 2002) tried to separate these activities while depending largely on a paper of Nordforsk (1986) and stated that training research methods activities, through: set courses, study schemes and compulsory laboratory work, are not research and development as a teacher transmits knowledge in these activities, but activities in which PhD students have to proof they master the transmitted research methods often do posses an element of novelty and therefore do qualify as research and development.
1.2. Summary
Research and development can be defined by as followed by the Frascati manual (OECD 2002):
’Research and experimental development should comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications.’
Although the definition as used in the Frascati Manual (OECD 2002) is the most used
(OECD 2002) also named four types of activities which should definitely not be considered as research and development because although they do have technological and scientific
2. Definition and explanation of tax incentives, tax allowances and tax credits
In order to understand and discuss the tax incentives as used by several countries, one needs to know what a tax incentive is and in which forms tax incentives can exist. In this chapter I will discuss tax incentives and two forms of tax incentives in general as well as provide for a definition of tax incentives. Two forms of tax incentives that will be discussed are: tax allowances and tax credits. These two types of tax incentives both focus on the taxable amount or tax amount. Tax incentives which focus on stimulating research and development by lowering the corporate income tax rate, like the Dutch tax incentive: the ‘innovatiebox’, will not be discussed in this paper. After a discussion of the definition of the term tax
incentive the different kinds of tax incentives, followed by the characteristics of tax incentives like tax incentives focusing on incremental research and development or volume based tax incentives which focus on the total level of research and development preformed will be elaborated on. On top of that tax incentives may also be categorized by their expense bases such as a current or capital expenditure expense base. In paragraph 2.4 the difference between tax allowances and tax credits, the types of tax incentives discussed in this paper, is discussed and formulas for both types of tax incentives are provided to illustrate the difference between tax allowances and tax credits.
2.1. Definition of tax incentive
Several definitions of the term tax incentives have been developed. For example Zee et all. (2006) both give a definition of a tax incentive in statutory terms as well as in effective terms. Zee et all. (2006) defined a tax incentive in statutory terms as followed:
A special tax provision granted to qualified investment projects that represents a statutorily favourable deviation from a corresponding provision applicable to investment projects in general.
burden of a tax for certain individuals, but what is a excess burden? Auerbach (1982) defines the excess burden of a tax as:
‘the amount that is lost in excess of what the government collects.’
This definition is quite vague. It means that when a tax is introduced, a greater part of individuals’ total income is lost in excess of the tax revenue collected by the government. This excess loss is called the excess burden. The excess burden increases as the tax increases, therefore by decreasing the tax by means of tax incentives, the excess burden will decline also.
2.2. Different kinds of tax incentives
The decrease in excess burden by means of tax incentives, as discussed in the above paragraph, can be realized by amongst other a lower corporate income tax rate or by increasing deductible costs in order to decrease the taxable object. In other words there are several kinds of tax incentives that decrease the excess burden. For example the OECD (2001), United Nations (2000) and Fletcher (2002) presented several tax incentives:
- tax holidays
- reductions of corporate income tax rates for certain sectors - accelerated capital allowances
- investment tax credits2 - location based incentives. - tax allowances
Tax holidays are temporary reductions or exemptions from tax. For example young innovative start up firms could be relieved from corporate income tax for the first three years. Reductions of corporate income tax rates for certain sectors are measures like not taxing a specific
incentive mentioning that research and development from IT. Accelerated capital allowances allow companies to write off certain investments immediately. For example a company invests € 100.000 in a new machine, which is innovative for the company. Usually a company only is allowed to deduct a percentage of the cost from the taxable object but with a
accelerated capital allowance 100% may be deducted from the taxable object. Investment tax credits reduce the amount of tax payable by a percentage of the research and development expenses. Location based incentives tie a tax relief to a certain geographic area. An example is a measure stimulating research and development only for enterprises situated in silicon valley issued by the United States.
Another incentive which is not mentioned by OECD (2001), United Nations (2000) and Fletcher (2002) is the tax allowance. A tax allowance is a measure that allows an extra depreciation of in this case research and development costs. In a numerical example: An enterprise spends € 100.000 on research and development and is allowed to make use of a 150% tax allowance. This means that the enterprise may deduct € 150.000 in excess of the € 100.000 spend on research and development.
Different countries use different tax incentives. For example Australia allows a deduction of 125% till 175% on costs concerning all kinds of research and development by means of a tax allowance, where Croatia differs her tax allowances amongst the three types of research and development: 150 % of all costs for fundamental research, 125% of all costs for applied research and 200% of all costs for experimental development.
By looking at the different kinds of tax incentives as discussed above in this paragraph, the tax incentives broadly can be divided into two types of tax incentives: tax incentives that stimulate through lowering the corporate income tax and tax incentives that stimulate through lowering the taxable object or the tax payable. The two tax incentives that are discussed here, tax allowances and tax credits, are both tax incentives that stimulate through lowering the taxable object. This paper focuses on tax credits and tax allowances, these types of tax incentives therefore only are discussed here below.
2.3. Explanation on tax incentives decreasing the taxable object or tax payable
Tax incentives focusing on stimulation through lowering the taxable object, can be structured in different forms. For example the costs that are allowed to be deducted can vary, the base of a tax incentive can be the total volume or incremental research and development costs,
the total volume of research and development and tax incentives focusing on incremental research and development, other important subjects regarding tax incentives and at last definitions of both tax credits and tax allowances.
2.3.1. Costs allowed for tax incentives
When focussing on costs that qualify for tax incentives there are three types according to Van Pottelsberghe (2003): Research and development wages, current research and development expenditure and current and capital research and development expenditure. While research and development wages speak for themselves, current and capital expenditure do need some explanation. Current expenditure includes the wages and also consumables that are consumed in the year of purchase. This way not only labour is stimulated, but also miscellaneous used. Current expenditure for example is used by among others the United Kingdom, Czech Republic and Norway. Capital and current expenditure contains all costs that are involved with research and development. This way the stimulation of research and development is in no way influenced by the costs that can be deducted. On the other side public costs can rise exponential if no threshold regarding to output is built in the mechanism. Some countries use a slightly different form of allowed costs, called current expenditure and machinery and equipment. This means that both recourses like for example printing paper as current expenditure and high technological machines as machinery and equipment for used for research and development apply for the tax incentive. This form of allowed costs is used among others by Australia, Austria, France and Italy.
2.3.2. Total volume or incremental based tax incentive
The base for the tax incentive can consist of total volume research and development costs or incremental research and development costs, thereby stimulating extra investments in research and development only.
50%, the value of the volume based tax incentive is € 75.000 and the value of the incremental based tax incentive is € 25.000.
Using a volume based tax incentive has the advantage that no interference with the market exists in determining what level of research and development costs are optimal. On top of that the volume based tax incentive is more straightforward and less subject to fluctuations, which is deemed to be of importance as more and more countries move to a volume tax base (OECD 2010). Van Pottelsberghe (2003) also recognises some disadvantages regarding the volume based tax incentive. He says that a volume based tax incentive is much more costly and it is the least appropriate tax incentive of the two types to reward additional research and development expenditure. Countries that use a volume based tax incentive are for example Norway, Denmark and the United Kingdom.
When looking at an incremental tax base, there are two types of tax bases: A rolling average incremental based tax incentive and an average fixed incremental based tax incentive (Van Pottelsberghe 2003). With the rolling average incremental based tax incentive, the base of the tax incentive consists of the average research and development costs in the last x years.
Example
year 1 till 3, resulting in a value of € 125.000 which is € 50.000 higher than the value of the incremental based tax incentive using a rolling average.
2.3.2.1. Advantages and disadvantages of volume and incremental based tax incentive
One advantage of the rolling average incremental based tax incentive is that the government subsidises less research and development that would be exercised without a government subsidy (OECD 2010). Van Pottelsberghe (2003) recognised two types of arguments against incremental tax bases: business perspective arguments and governmental perspective
arguments. The business perspective arguments are: A tax incentive with a rolling average incremental tax base is more complex to use than a rule with volume based tax incentive, such a rule is harder to apply by businesses as they have to calculate the value of the tax incentive. The example in the above paragraph illustrates the amount of calculus necessary for a rolling average incremental tax base. In the long run such a tax incentive will not lead to any tax advantage at all. This rule distorts the tax planning of companies and for small and medium enterprises such a tax incentive is almost not feasible to implement. On the other hand governmental perspective arguments include: It is more difficult to implement a proper working incentive with incremental tax base than an incentive with volume tax base, it includes higher administrative costs as the research and development costs of past years need to be documented, an incremental tax base is less effective in stimulating research and
development in the long run and it requires difficult to obtain information.
With the incremental average fixed tax base the tax base is determined by a fixed reference period. To keep the fixed reference period up to date, the reference period can be adjusted for inflation. According to Van Pottelsberghe (2003) a fixed incremental average tax base has even more disadvantages than a rolling incremental average tax base to both business and governments, including the following disadvantages: It is even more complex to
implement than a tax incentive with a rolling average tax base and the administrative costs for governments are even higher as the fixed reference period needs to be adjusted for inflation. Eisner et all. (1984) formulated the argument that in the long run an incremental tax credit will not lead to a tax advantage for companies in the period around 1980 - 1981 for the United States. They calculated the marginal effective tax credit (METC), which measures the
20% of the companies. The incremental tax base is used among others by the United States and Ireland.
In order to complete this paragraph, we discuss the countries that use both a volume tax base and incremental tax base. Countries that use both types of tax base are amongst others: Portugal and Japan. Portugal provides a volume based tax credit of 32,5% and a incremental based tax credit of 50%. Portugal uses a rolling average base for the incremental based tax incentive. Japan provides a volume based tax credit of 12% for small firms and 8 to 10% for large firms. Next to the volume based tax credit, Japan also provides a incremental based tax credit of 5%. For the incremental based tax credit Japan uses an rolling average base. The maximum value of the tax incentive is 30% of the tax payable, divided for 20% over the volume based tax incentive and 10% over the incremental based tax incentive.
2.3.3. Other important subjects regarding tax incentives lowering the taxable object or tax payable
There are several other important subjects regarding tax allowances/tax credits that have to be considerd when assessing the effectiveness of tax incentives, for example: Carry back- and forwards, the appliance cost for a tax incentive and minimum or maximum thresholds.
Using carry back and carry forwards is important for both tax allowances and tax credits when calculating their respective value. Some countries use taxable income instead of the total taxable amount meaning that when a loss is incurred the research and development tax allowance can not be enjoyed. A carry back of carry forward can, in theory, also be implemented in a tax credit, but this leads to a high administrative burden. The high administrative burden is due to the fact that in order to implement carry back and carry forward in a tax credit a separate administration needs to be maintained including the income from research and development that needs to be taxed at a lower rate.
availability of research and development tax incentives can be increased and therefore the cost of administering for the tax incentive will be decreased.
The effectiveness of tax incentives may also be influenced by minimum and maximum thresholds. It is obvious that tax incentives with maximum thresholds are limited in the way they can serve to increase the total level of research and development. The question arising with maximum thresholds is: Is research and development stimulated in excess of what volume would be produced without a tax incentive? Then again a minimum threshold can be compared with an incremental tax incentive. An incremental tax incentive consists of a minimum threshold in either a fixed base or a rolling base. This suggests that a incremental based tax incentive with a minimum threshold can not, in the long run, stimulate research and development as it does not surpass the minimum threshold because an enterprise reaches the maximum research and development costs it can carry. Therefore both minimum and
maximum thresholds provide a limitation on the effectiveness of a tax incentive.
2.4. The difference between tax allowances and tax credits
In most of the studies conducted to achieve empirical results regarding the effectiveness of tax incentives, the terms tax credit and tax allowance are used as substitutes. In the study of Van Pottelsberghe (2003) the difference between tax allowances and tax credits was illustrated. Van Pottelsberghe (2003) used the following formula for tax allowances:
Cost reduction = R&D * TA * τ
And for tax credits Van Pottelsberghe (2003) used this formula:
Cost Reduction = R&D * TC
R&D is the total amount of research and development expenditure eligible for the tax allowance, cost reduction is the amount of tax to be paid less, TA is the applicable tax allowance rate in percentage, τ is the applicable corporate income tax rate and TC is the applicable tax credit rate used.
be paid. In other words a tax allowance is deducted from the taxable amount and the tax credit is deducted from the amount of tax paid.
Both tax allowance and tax credits are measures allowing a corporation to deduct more than 100% of the investment if provided by the tax incentive whereas with depreciation a maximum of 100% can be deducted. For example the United Kingdom, for the fiscal year 2009, allows to deduct 175% of the costs concerning research and development for small and medium companies and 130% of the costs concerning research and development for larger firms as a tax allowance.
As tax allowances are deducted from the taxable amount and tax credits are deducted from the tax amount, tax allowances usually provide for a higher tax incentive rate. For example a tax allowance provides 150% tax incentive rate and the corporate income tax rate is 25%. This way the impact of a tax allowance ought to be the same as a tax credit with a tax incentive rate of 150% * 25% = 37,5%.
2.5. Summary
2.5.1. Definition of tax incentive
Zee et all. (2006) defined a tax incentive in statutory terms as followed:
A special tax provision granted to qualified investment projects that represents a statutorily favourable deviation from a corresponding provision applicable to investment projects in general.
2.5.2. Different kinds of tax incentives
Tax incentives can be found in all sorts of ways, for example there are (OECD 2001, United Nations 2000 and Fletcher 2002): Tax holidays, reductions of corporate income tax rates for certain sectors, exemptions of corporate income tax rates for export companies, accelerated capital allowances, investment tax credits, location based incentives, reduced taxes on dividends and interests earned abroad, preferential treatment of long term gains, exemptions from indirect taxes, export processing zones and deductions for qualifying expenses.
Tax incentives can have several cost bases. When focussing on costs that qualify for tax incentives there are three types according to Van Pottelsberghe (2003): Research and development wages, current research and development expenditure and current and capital research and development expenditure.
Tax incentives can be based on total volume research and development costs or just the incremental research and development costs, thereby stimulating only extra investments in research and development. There are several advantages and disadvantages for using a
volume or incremental based tax incentive. For example using a volume based tax incentive has the advantage that no interference with the market exists in determining what level of research and development costs are optimal. When looking at an incremental based tax incentive, there are two types of tax incentives: A rolling average incremental based tax incentive and a average fixed incremental based tax incentive (Van Pottelsberghe 2003). With the rolling average incremental based tax incentive, the tax base consists of the average research and development costs in the last x years. One advantage of the rolling average incremental tax base is that the government subsidises less research and development that would be exercised without a government subsidy (OECD 2010). A disadvantage of the rolling incremental tax base is: that is more difficult to implement a proper working incentive with incremental tax base than an incentive with volume tax base (Van Pottelsberghe 2003). With the second kind of tax incentive, the incremental average fixed tax base, the tax base is determined by a fixed reference period. To keep the fixed reference period up to date, the reference period can be adjusted for inflation. According to Van Pottelsberghe (2003) to business and governments a fixed incremental average tax base has even more disadvantages than a rolling incremental average tax base, including the following disadvantages: It is even more complex to implement than a tax incentive with a rolling average tax base and the administrative costs for governments are even higher as the fixed reference period needs to be adjusted for inflation.
2.5.4. The difference between tax allowances and tax credits
Van Pottelsberghe (2003) put both types of tax incentives that will be considered in this paper in a formula: tax credits and tax allowances. He formulated tax credits as followed:
Cost Reduction = R&D * TC
And he formulated tax allowances as followed:
Cost reduction = R&D * TA * τ
R&D is the total amount of research and development expenditure eligible for the tax allowance, cost reduction is the amount of tax to be paid less, TA is the applicable tax allowance rate in percentage, τ is the applicable corporate income tax rate and TC is the applicable tax credit rate used.
3. Proof of tax incentives influencing research and development
The stimulus of research and development through tax incentives has been studied for decades and formed concessive evidence that a tax incentive can increase the level of research and development performed in a country. Although most research papers focus on empirical evidence, theoretical arguments regarding the effectiveness of tax incentives in stimulating research and development are also available. First we will review the literature concerning the theoretical evidence followed by a literature review of the empirical evidence.
3.1. Theoretical literature of tax incentives influencing research and development
To demonstrate that there is a positive effect between tax incentives and an increase in research and development, albeit marginal, theoretical literature is available concerning this positive effect. This literature focuses on the fact that research and development is a public good. More theoretical literature is written about the difference between direct (government subsidies) and indirect (tax incentives) government support, focusing on which kind of government support stimulates research and development the most. For example Van Pottelsberghe (2003) identifies five differences between direct and indirect government support. These differences can be regarded as advantages for indirect government support. Furthermore literature is available in which the use of tax incentives focusing on corporate income tax rates versus the use of tax incentives focusing on higher deduction of the taxable or tax amount are analyzed.
3.1.1. Research and development as a public good
cheaper, other companies can use the same method at the same time. The only way to protect the new production process is to guard the factory, ensure that personnel signs confidentiality contracts and no visitors could enter the factory which assumes high costs and is in line with the second characteristic of a public good. This example illustrates that research and
development qualifies as a public good.
3.1.2. Theoretical Evidence of tax incentives outperforming direct government support
Knowing that research and development can be considered a public good, the question is how public sector can stimulate research and development optimal. Government has two options to stimulate research and development: Through direct government support and indirect
government support. The most used example of direct government support is support by subsidy, where tax incentives are a form of indirect government support.
Ientile and Mairesse (2009) stated that there are different advantages and disadvantages regarding the choice for direct or indirect government support. The question is whether these advantages and disadvantages can be weighted in such a way that there can be a comparison between direct and indirect government support. In a study for Norway Hægeland and Møen (2007) made such a comparison and listed all measures from most effective to less effective measure to be used by the government. They concluded that tax incentives are the best way to support research and development followed by grants from the Norwegian research council, government agencies and measures provided by the European Union.
Reasons for tax incentives outperforming subsidies are given by Ientile and Mairesse (2009). Ientile and Mairesse (2009) stated that one of the great advantages of indirect government support, as supposed to direct government support, is that enterprises are not influenced by the fact that the government chooses which projects are eligible for subsidizing and which projects are not. In other words the market chooses which research and
development projects will generate the highest gain and therefore the efficiency of the market is used optimally. On the other hand Blanes and Bussom (2004) suggest that the cost of introducing research and development projects is diminished by the fact that direct
success of different research and development projects: Private sector or public sector. As noticed this question also depends on the type of firm, as smaller enterprises do not have the resources to hire experts and therefore can not asses the value of research and development projects as accurately as larger enterprises. Van Pottelsberghe et all. (2003) found five
differences between direct government support and tax incentives. First, tax incentives do not differ between the types of research and development, where direct government support can be used explicitly to select research and development incentives that are deemed to be
3.1.3. Theoretical arguments regarding the effect of different kinds of tax incentives
In 2007 the OECD published a report in which it formulated the advantages and
disadvantages for different types of tax facilities (focused on earlier research by OECD (2001), United Nations (2000) and Fletcher (2002). The report (OECD 2007) stated that investment tax credits3 have two significant advantages: Investment tax credits can be targeted to certain types of activities and investment tax credits help with liquidity constraints.
Disadvantages of investment tax credits are, according to this rapport: Investment tax credits have quite a high administrative burden and investment tax credits discriminate against long term investments which only generate positive returns after several fiscal years. The OECD rapport (2007) also focused on tax incentives that decrease the corporate income tax rate, like a tax holiday, which is often used by developing countries. The OECD (2007) named three different advantages of using a tax holiday. At first it is a reduction of the entire tax liability. Second, introducing a tax holiday can be done relatively simple and has low compliance cost. The last advantage of a tax holiday is the fact that it is quite easy to administer. But if this measure is so easy and cheap to implement and use, why do only developing countries use this measure? This answer is given in the same report by the OECD (2007). They (OECD 2007) found several disadvantages of using a tax holiday. These disadvantages are amongst others: The loss of revenue through a lower tax rate is often to be recovered by decreasing the number of tax deductions, the amount of the relief depends on how losses are treated, the amount of the relief depends on the starting period of the relief and it is open to several tax planning opportunities by moving the taxable profits to enterprises which qualify for the tax holiday. On top of these disadvantages, tax holidays are not useful in stimulating certain types of costs like research and development because all profit is taxed at a lower rate.
Zee et all. (2002) focused on advantages of tax allowances compared to tax facilities lowering the overall corporate income tax rate. They stated that specific types of investments are more stimulated by tax allowances compared to tax facilities focusing on lower corporate income tax rates and the loss of tax revenue can be much better controlled by governments trough tax allowances. This argument exists because a reduction in tax rates can not easily be denied to certain groups and therefore more government revenue has to be spend to also stimulate the specific group. But Zee et all. (2002) also recognized some disadvantages regarding tax allowances compared to tax incentives focusing on lower corporate income tax rates. The arguments they (Zee et all., 2002) named are: When receiving tax allowances as the
investment is done, investing in short term projects is much more beneficial as the tax allowance can be used more often and there is a serious danger that the tax allowance will be abused by bigger companies through buying and selling the qualifying goods and thereby increasing the use of the tax allowance. Zee et all. (2002) pointed out that the advantages and disadvantages they recognized with tax allowances can also be implemented to investment tax credits under the assumption that the corporate income tax rate is flat. For tax systems with a progressive corporate income tax rate a difference does exist according to Zee et all. (2002). They argue that the value of a tax credit does not increase when the tax rate increases, whereas with a tax allowance an increase in the tax rate increases the value of the tax allowance. This makes it more favourable for governments to use a tax credit, as it does not harm the principle of equality.
3.2. Empirical evidence of tax incentives influencing research and development
Throughout the years numerous papers have been written about the effect of tax incentives influencing research and development. Most papers focus on econometrical evidence and the flaws that can occur while doing these econometrical research. Some studies use the price elasticity of demand (Bloom et all., 2002), while others compare the level of incremental output with the loss in tax revenue (Hall and Van Reenen, 2000). After discussing the evidence regarding the overall effectiveness of tax incentives, the empirical research comparing tax incentives to direct government support will be discussed. In contrast to theoretical evidence no empirical evidence about differences between different tax incentives in respect of stimulating research and development exists.
3.2.1. Empirical evidence on the effect of tax incentives on research and development
United States, a price elasticity of demand lower than 1, meaning that the product research and development is price inelastic and the effect between tax incentives and research and development is relative weak, although there is an effect between tax incentives and research and development. Then again there are several studies for the United States (Berger (1993), Hall (1993) and Hines (1993)) which calculated a price elasticity of demand lower than 1, which means that the effect between tax incentives and research and development is relative strong. Therefore we can conclude from these six United States studies that there is an effect between research and development, but United States studies are not sure how high the effect between tax incentives and research and development is. To make a solid review of the price elasticity of demand for research and development, also non United States studies have to be examined. Examples of non United States studies are amongst others Asmussen and Berriot, who (1993) did a study for France and found a price elasticity of demand of 0.26 and
McFetridge and Warda (1983), who studied the tax incentives of Canada and found a price elasticity of demand of 0.6. Both non United States studies found price elasticity of demand lower than 1, indicating that research and development is a relative inelastic product.
The here above given empirical evidence that research and development is stimulated by tax incentives trough the price elasticity of demand is relative old. More recently evidence is provided by Klassen et all. (2004), which did an econometric study of 58 firms in Canada between 1991 and 1997 and found out that, on the margin, one dollar of tax incentives stimulates research and development with $ 1,3. Other more recent evidence is found by Baghana and Mohnen (2009), which did research for firms in the region of Quebec and found that the price elasticity of demand for this firms is 0.14 in the short run and 0.19 in the long run. They (Baghana and Mohnen 2009) also found that these results were in line with earlier research done in Canada.
Other evidence is gathered by Hall and Van Reenen (2000), which presented a review of the evidence that tax incentives have a positive effect on research and development. They (Hall and Van Reenen, 2000) argue that the effect of tax incentives on research and
development can be measured in two different ways. The first option is to check if the marginal social cost match the marginal social revenue of the extra output of research and development produced by the tax incentive. While in theory this represents the maximum social profit, in practice the costs of finding the social costs and revenues of a tax incentive are excessively high. Therefore most research focuses on the second option to measure the effect of tax incentives on research and development: comparing the loss of tax revenue with the incremental research and development. Hall and Van Reenen (2000) conclude this type of measuring from 11 studies about the effect of tax incentives on research and development in the United States and from 10 studies in non United States countries. From these studies they (Hall and Van Reenen, 2000) conclude that tax incentives do have a positive effect on
research and development. They also conclude that the best results occur when the user costs of research and development are calculated and using this information in an explicit
econometric model.
3.2.2. Empirical evidence of tax incentives stimulating research and development better than direct government support
Before a comparison of empirical literature between direct and indirect government support can be done, a short review of literature discussing the effect of direct government support is needed. In other words the evidence that direct government support does stimulate research and development. For example Duguet (2003) found that subisidies do stimulate research and development and he found that subsidies do not only crowd out private investments in
research and development. In other words direct government support does not only replace the private subsidizing of research and development but increases the overall level of research and development. He (Duguet 2003) also found that subsidies only stimulate research and development if other sources of financing, either public or private, are not stimulated. Other evidence was presented by Czarnitzki et all. (2007) in a study of Finnish and German firms, recognizing that especially Finnish firms which currently receive subsidies would perform worse without this government support. Firms that are currently operating without
These two papers illustrate that both subsidies and tax incentives stimulate research and development and therefore subsidies are a substitute for tax incentives. The question arising now is, if subsidies are a better way of stimulating research and development than tax incentives? Hægeland and Møen (2007) found that for Norway the tax credit produces for every kroner paid by the public sector 2.86 kroner of private intramural research and development. And every kroner paid by the public sector trough subsidy creates only 2.07 kroner spent on research and development. For subsidies issued by the European Union the results are even worse. Every kroner spent by the European Union results only in an increase 0.75 kroner of research and development. Contrasting evidence was found by Busom et all. (2012). They state that for small firms facing high financing constraints subsidies work better than tax incentives.
3.3. Summary
In these paragraphs the theoretical arguments and empirical results regarding the impact of tax incentives on research and development have been discussed. Several studies exist about the impact of tax incentives on research and developments, while some papers also try to define if direct government support, like subsidies, or indirect government support, like tax incentives, are more effective tools for increasing research and development. With regard to choosing different types of tax incentives only theoretical evidence exists and therefore this paper tries to make a first step in assessing which type of tax incentive stimulates research and
development the best.
In theory all types of government support are effective because research and
development is a public good, meaning that trough private markets not enough research and development can be produced. The question is however, which type of tax government support is the most effective tool for stimulating research and development.
contrast, government subsidies are more focused on social versus private returns and the budget control for government subsidies is much easier.
Having determined that indirect government stimulates research and development better than indirect government support, the OECD (2001), United Nations (2000) and Fletcher (2002) presented a list with several kinds of tax incentives with their respective advantages and disadvantages. For example investment tax credits have a significant
advantage with regard to other tax incentives: Investment tax credits can be targeted to certain types of activities. Disadvantages of investment tax credits are, according to this rapport: Investment tax credits have quite a great administrative burden and investment tax credits discriminate against long term investments which only generate positive returns after several fiscal years.
There has been excessive empirical evidence about the effect of tax incentives on research and development. Especially the effect of tax incentives in the United States during the 80’s and 90’s has been excessively studied. A good starting point is the research done by Bloom et all. (2002), which researched the impact of tax incentives of nine OECD countries over a time period of 19 years. They (Bloom et all., 2002) found that decreasing the cost of research and development by 10% would lead to an increase in the overall level of research and development of 1% in the short run and almost 10% in the long run. Other evidence is provided by Klassen et all. (2004), who did an econometric study of 58 firms in Canada between 1991 and 1997 and concluded that, on the margin, one dollar of tax incentives stimulates research and development with $ 1,3.
4. Outline of the Research
In this chapter we will discuss the outline of the research comparing tax credits with tax allowances as stimulators of research and development. Tax credits and tax allowances are compared trough three different factors. These factors are: the number of patents and
trademarks produced in a country per million of inhabitants per year, the percentage of gross domestic product spent on the tax incentive and the before tax costs of the tax incentive in the form of the B-index. I will first discuss the selected tax incentives and their extra features like minor extra tax incentives, followed by the three factors which are measured. Next I will discuss the restrictions regarding this paper. In appendix A a list of all tax incentives discussed in this paper is included. Appendix B contains a list of the data used in this paper.
4.1. Selected tax incentives from different countries
For this paper I have chosen to analyze the tax incentives regarding research and development of 18 different countries. Focus lies on the tax incentives as stated by tax law for the fiscal year of 2008 because in this fiscal year data regarding the three measured factors was available which could be easily linked to the different types of tax incentives. The tax incentives are evenly divided between tax credits and tax allowances.
To make a choice between countries stimulating research and development through tax incentives that are suitable to analyze in this paper, the tax incentives have to consist of only a tax allowance or only a tax credit. For example Belgium had multiple tax incentives in the fiscal year 2008. To wit a R&D tax credit/tax allowance and a Payroll withholding tax credit, which focused primarily on wage taxation. When a country uses multiple tax incentives to stimulate research and development like the example of Belgium mentioned above, one can not divide the effects of every tax incentive and analyze them separately. Therefore no real evidence can be conducted from the tax incentives of these countries. But if the data was gathered so precisely that only countries using one tax incentive to stimulate research and development, no more than a handful of tax incentives would be of a high enough standard. Therefore tax incentive programs that do have minor secondary tax incentives are included in the data as well.
expense base and availability of a carry forward. The different types of tax incentives are discussed in chapter two. For more information on these types one should read chapter two. First we will discuss tax credits followed by tax allowances.
4.1.1. Selected tax credits
There are nine tax credits issued by different countries that are examined in this paper. We used the tax credits of the following countries:
- Japan - Portugal - France - Italy - Canada - United States - Ireland - Norway - South Korea
Over half of the countries uses both a volume based tax credit and an incremental based tax credit. Amongst these countries are South Korea and Portugal. The incremental based tax credit rates differ between 5% for Japan to 50% for South Korea and Portugal. Only South Korea has different incremental based tax credit rates for small and medium firms and large firms.
The types of costs qualifying for the tax credit (the expense base) differs greatly between the different countries. Almost every country allows the deduction of current cost with the exception of Canada, which only allows the deduction of current machinery and equipment. Ireland has one of the most elaborate expense base, allowing the deduction of current cost and machinery and equipment (volume scheme) and R&D buildings (incremental scheme).
Most tax credits use a carry forward although there are some exceptions. For example France and Norway do not apply a carry forward nor a carry back and Ireland only applies one year of carry back. The greatest amount of carry forward is given by Canada and the United States, which provide carry forward for at least 20 years. This is a large carry forward provision as one realizes that most patents for innovation only lasts 30 years.
There are three countries which provide minor tax incentives which can not be marked as tax credits. Japan provides an alternative rule on incremental research and development for small and medium enterprises in the form of 20% tax credit on the increase in research and development expenditure. Next the United States provides two measures which apply as substitute for the tax credit. These measures are: The Incremental Research Credit (AIRC) and the Alternative Simplified Credit (AISC). The last country which also used other tax incentives is South Korea. This country also has a temporary credit which provides 10% on M&E and a tax incentive stimulating foreign research and development researchers the first 5 years. The data of these three countries should be considered in line with the other tax
Table 1: Countries using tax credits and their minor R&D tax incentives
Country: Minor tax incentive: Important characteristics: United States The Incremental Research
Credit (AIRC) and the Alternative Simplified Credit (AISC)
These tax incentives can not be used at the same time with the tax credit but are
substitutes
Japan 20% tax credit on the
difference between research and development and one tenth of sales for past three years
The only tax credit or even tax incentive that is linked to the overall level of sales
South Korea Temporary tax credit of 10% on machine and equipment and 100% deduction of wage foreign researchers for first 5 years.
The deduction of wage is only eligible for foreign researchers
Source: OECD 2010, 2011 and Erawatch (2013) site
4.1.2. Selected tax allowances
Next to the nine tax credits, nine countries use tax allowances. The countries using tax allowances which are used for this paper are:
For tax allowances every incentive focuses on a volume based tax allowance and no
allowance focuses on an incremental based tax allowance. Just as the volume based tax credit rates, the volume based tax allowance rates also are different for small and medium firms and large firms. The volume based tax allowance rate for small and medium firms lies between 45% for Australia and 200% for Czech Republic and Denmark, the average is 153.3% and the median is 150%. Again almost every country has a lower or equal volume based tax
allowance rate for large firms with regard to small and medium firms. The volume based tax allowance rates for large firms differ between 40% for Australia and 200% for the Czech Republic and Denmark. The average volume based tax allowance rate for large firms is 147,8%, which is slightly lower than the average of small and medium firms and the median is equal to the median of small and medium firms. The range of volume based tax allowance rates for small and medium firms is slightly lower than the range of large firms, illustrated by a standard deviation of 43% for small and medium firms and 44.2% for large firms.
When looking at the expense base, tax allowances can be compared with tax credits. Most of the expense base at least focus at current cost, where there are few exemptions like South Africa, which focuses on any research and development related expenditure. A special reference is allowed to Poland as they have an expense base only focusing on patents and other intangibles.
With respect to carry forward there are huge differences. Over half of the tax
allowances do not have any form of carry forward, where as for example the United Kingdom has a carry forward for infinity. The carry forward for the tax allowance of Australia should be noticed as it distinguishes between small and medium firms, which are allowed to carry forward, and large firms, which are not allowed to carry forward.
Table 2: Countries using tax allowances and their minor R&D tax incentives
Country: Minor tax incentive: Important characteristics: South Africa Tax incentive regarding
scholarships and human resource
Not available
China General tax reduction for
R&D firms located in certain new technology zones
Also available for high technology firms and software development firms
4.2. Factors measured
While studying which tax incentive, a tax credit or a tax allowance, stimulates research and development the most, this paper will focus on three factors: The before tax costs of the tax incentives as calculated by one minus the B-index as described by Warda (2005), the number of patents and trademarks produced per million of inhabitants and the percentage of gross domestic product. These three factors are very representative for research and development. The B-index measures the total cost reduction through tax incentives of stimulating research and development and therefore has an immediate connection between tax incentives and research and development. Patents are the most visible output of successful research and development, but successful research and development is not always visible. For example Coca Cola invented the perfect formula for cola but never patented her formula. The perfect formula for Coca Cola did made a strong trademark. Therefore also trademarks are analyzed in order to get a good view of the level of research and development in a country. Because patents and trademarks only look at successful research and development, also the percentage of gross domestic product is analyzed. This factor measures the total level of research and development using a tax incentive, both the successful and the non successful research and development. The number of patents per million of inhabitants and the B-index can be described as an output measure, where the percentage of gross domestic product can be described as an input measure. The three factors will be measured by average, median, and the standard deviation These factors and their limitations are discussed in this paragraph. On top of that omissions in the data concerning the three factors will be discussed.
The B-index, as stated by Warda (2005), measures the before tax present value of one euro invested in research and development of a tax incentive. These measures are also used by the OECD (2011b) in their measurement of innovation. Warda (2005) defines the B-index as followed:
B-Index = (1-A)/(1-t)
Where A stands for the net present discounted value of tax incentives and t stands for the corporate income tax rate. When explained in accounting terms, the B-Index describes a ratio of the after tax cost of one euro of expenditure divided by one minus the tax rate. The after tax cost is the numerator of the equation, which describes the B-index as the net cost to the company of investing in research and development while taking account of all tax incentives available. Warda (2005) also elaborates that the after tax cost is influenced by the corporate income tax rate. This way the formula could let people to believe that a higher corporate income tax rate is beneficial to enterprises. Therefore the B-index measures the before tax costs of an investment in research and development. In this paper one minus the B-index is measured, illustrating that an increase in the factor also means that the effect of a tax incentive increases.
No omissions exist in the data concerning one minus the B-index. Data is available on all countries using tax credits and tax allowances for small and medium enterprises and also large enterprises. All data is available for the fiscal year of 2008.
4.2.2. Percentage of gross domestic product spent on tax incentive
tackled because the number of patents and trademarks, that do represent successful research and development, is also being measured.
The data regarding tax credits is without any omission. On the contrary, with respect to the data regarding tax allowances a few omissions exist. Over half of the data concerning the percentage of gross domestic product spent on tax allowances are not available. This leaves only half of the countries using tax allowances to study and this should be born in mind when interpreting the results. Moreover, the data are based on the fiscal year of 2007. This is not crucial in determining which type of tax incentive stimulates research and development the best because no large changes have found place in the tax incentives from the fiscal year of 2007 till 2008.
4.2.3. Patents and trademarks produced per million of inhabitants
