Innovation challenges of research and development taxation

The main goal was to show why taxation of research, development (R&D), and innovation (R&D&I), is important for companies. Innovation as we know can occur in several ways, such as learning by doing, imitation, and by innovative use of existing knowledge. Yet the most promising approach is research; the basic reason why R&D plays such an unquestionably great role in terms of long-term growth. Among the European Union (EU) member states, the highest share of innovative enterprises during the period 2010–12 was observed in Germany, and the lowest share was recorded in Romania.

The use of public funds for private sector innovation and research activities, and to remove the obstacles that hinder implementation and deployment of ideas, is supported and encouraged by the EU. In 2020, EUR 80 billion is available in the Horizon 2020 program grant for these activities. The R&D&I processes play a major role in each region, and within that, improve the competitiveness of companies. The union is encouraging member states to increase the gross domestic product (GDP) for 2020 to 3% of research and innovation. Documentation of R & D projects is key for accounting and taxation, especially the activities of R & D classification, and taking into account the amount of related costs and the composition of the tax and tax base, this regulation varies according to countries.

Not all businesses can access EU funds. For these businesses, state support in the form of the tax base and tax benefits can be another option.

In certain countries of the EU I have observed how they motivate research and development activities. For instance in Hungary, domestic tax laws provide some opportunity for companies to achieve tax base reductions and, where applicable, tax benefits performed in connection with exploration and development projects. The three tax discounts are the following: corporate tax, local business taxes, and indirect contribution to innovation.

How can we reduce the local business tax and promote innovation contribution with R & D activities? The most important cost for the business is the corporate tax. For research and development activities, two points are: tax base allowance and development tax allowance. I have analysed development tax allowances in Hungary by regions for the period between 2004 and 2014. Specifically, how they changed, and what this allowance influenced.

Keywords: R&D, innovation, taxation, corporate tax

JEL Classification: O 32, L10, L60