More countries are offering new credits, and it’s important to understand required documentation.
Key takeaways
Tech companies should assess R&D tax implications of producing iterative versions of products.
We highlight key R&D tax issues that tech companies should consider for international growth.
For tech companies expanding operations beyond their home markets, research and development tax incentives in the countries they are targeting are an important consideration. While R&D incentives are not typically the sole determinant of business decisions, they can significantly influence the attractiveness of potential locations for global expansion. The specifics of what constitutes R&D, how credits are calculated and which costs are eligible can differ greatly among countries.
In the United States, for instance, companies can claim an R&D tax credit for qualified research activities, but the credit is not refundable. This means that until a company becomes a taxpayer paying income tax, the credit remains unused. (Certain qualified small businesses, however, may be eligible to use that credit against payroll taxes.) In contrast, some countries offer refundable credits, which can be particularly advantageous for startups that might not yet be profitable. For example, France allows companies to obtain a cash return on their R&D expenses even if the work is performed in other European Union countries.
Companies looking to expand global operations will also need to understand the implications of a potential global minimum tax, primarily the one proposed by the Organisation for Economic Co-operation and Development (though the ultimate outcome of that proposal remains to be seen). While more countries are offering new credits, it’s also important to understand the documentation required to substantiate eligibility for those incentives, plus any related transfer pricing considerations. Many countries are also increasing documentation requirements for filing, increasing the importance of businesses maintaining robust support of the activities and costs for which they are claiming credit.
Key R&D tax issues and strategies that tech companies should consider when planning their international growth include:
Qualifying costs and activities: One of the primary considerations is understanding what costs and activities qualify for R&D incentives in the target country. While the broad definition of R&D might be similar across jurisdictions, the nuances can vary. Countries may differ on whether overhead costs, salaries or contractor expenses are eligible. Some countries require that the R&D work be performed domestically, while others may allow expenditures incurred in foreign locations to qualify.
Ownership and structure: The ownership of intellectual property generated from R&D activities can affect the availability of tax incentives. In some jurisdictions, the country offering the credit must retain ownership of the IP, while in others, it may suffice if the ownership remains within the same corporate group. Companies must carefully consider how they structure their R&D operations to maximize the benefits of available tax incentives.
Application and compliance: Some countries require preapproval from relevant ministries or external validation from independent firms before companies can claim certain incentives, while others have simpler procedures enabling companies to file their claims directly with tax authorities, often without prior approval. Understanding these procedural requirements is crucial for ensuring compliance and avoiding potential pitfalls.
Percentage of incentives: The percentage of R&D expenditures that can be claimed as a tax credit or deduction also varies. For instance, while the United States offers a credit that typically ranges from 6% to 10% of qualified costs, other countries can provide much higher incentives. Some countries offer credits of up to 30% or 40% of R&D spend, making them highly attractive destinations for tech companies looking to maximize their R&D investments.
International tax planning and global compliance strategies can help your business across markets.
Tech sector considerations
Thorough research is an obvious place to start for companies considering how R&D tax incentives might play into their expansion plans. Understanding the specific requirements, benefits and compliance obligations can help companies make informed choices that align with their overall business objectives. And, of course, tax incentives are far from the only factor tech companies should weigh; organizations should assess whether there is qualified talent in the given location and then whether credits fit in strategically.
Even if a country has an appealing incentive, for instance, there may be other drawbacks of operating there, such as data privacy and safety considerations or new regulatory requirements to navigate.
Given the complexity and variability of R&D tax incentives, engaging with local tax professionals or consultants who are well-versed in the regulations of the target country can be beneficial. These teams can provide valuable insights, assist with compliance and help optimize the company's R&D tax strategy.
Beyond calculating immediate tax savings, companies should also consider the long-term impact of their R&D location decisions. Businesses need to account for factors such as the stability of the tax regime, potential changes in legislation and the overall business environment to ensure sustainable benefits.
Companies should also carefully plan the structure of their R&D operations to maximize tax benefits. This might involve setting up dedicated R&D entities in favorable jurisdictions, managing IP ownership strategically and ensuring that qualifying costs are properly documented and claimed.
Technology companies will also need to assess the R&D tax implications of producing iterative versions of their products (e.g., a new version of an app or a system update) rather than entirely new products. A third-party advisor can help businesses navigate the nuances that accompany that dynamic.
The takeaway
Navigating the global landscape of R&D tax incentives is a complex but critical task for tech companies expanding internationally. The right mix of research and planning can help businesses maximize the benefits of R&D tax incentives and achieve their expansion goals.
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