R&D Tax incentives in Belgium
In Belgium, as well as in other European countries, the use of R&D tax incentives has become more popular in recent years. It remains, however, important to evaluate the effectiveness of those new and existing measures.
Due to the existence of externalities, uncertainties and asymmetric information, businesses tend to invest less in research and development than is socially desirable. Direct subsidies and tax incentives are popular instruments for encouraging the private sector R&D spending level. Fiscal incentives are considered neutral as businesses allocate the public support themselves. Another attractive feature of these instruments is that tax incentives can be more predictable and accessible for businesses than direct subsidies. A possible drawback of fiscal instruments is that firms will not concentrate on projects with a high social rate of return. A number of empirical studies have found that R&D tax incentives, by reducing the cost of R&D, can be effective in stimulating additional R&D in businesses in the long term. However, the design and the implementation of the tax incentives seem to be crucial elements for their effectiveness.
Recent years have seen the introduction of very different types of new R&D tax incentives as well as changes in existing schemes in most OECD countries. Some countries, like Finland and Sweden, despite having high levels of R&D spending, do not use or have stopped using specific R&D tax incentives to stimulate private R&D investment. Belgian federal and regional authorities use both direct and indirect mechanisms for financing business R&D. Also, in Belgium a greater emphasis has been placed on the use of R&D tax incentives in recent years.
Until 2003, there were two main R&D tax incentives for firms in Belgium, which still exist. On the one hand, firms can apply, under strict conditions, for an investment deduction facility of 14.5% for R&D investments that have no detrimental effects on the environment and for patent investment. On the other hand, companies can obtain a fixed nominative and non-permanent tax allowance of around 13.000 euro for each additional researcher in the company in the year of recruitment. Both of these R&D tax instruments are not easily accessible for enterprises, due to their high administrative costs, and their strict conditions. The limited statistical information available shows that these tax incentives are unsuccessful since less then 10% of the Belgian R&D-executing firms are reached. Especially for the R&D investment deduction facility, we can observe that a small group of very large multinational enterprises, rather then young innovative SMEs, applies almost every year for this tax incentive. Young innovative enterprises are often discouraged to use the investment deduction facility due to the lack of profits, the lack of transparency and the enormous time delays in obtaining the necessary attestations. The investment allowance for additional R&D-personnel is unpopular since the administrative costs are too high with respect to the potential benefit. Furthermore, this measure lacks at present any kind of carrying forward clause for the fiscal advantage. Unfortunately, the lack of enough detailed statistical information does not allow us to make a complete picture of the effects of these measures.
Since 2003, the Belgian federal government has launched a tax exemption for the withholding tax on wages of researchers. This measure, which reduces the labour cost of Belgian researchers by at least 5%, was in the beginning only applied for researchers in universities, high schools and public research centers. Due to the high budgetary consequences that would be entailed, this tax exemption has not yet been extended to the more than 16,000 researchers working in Belgian companies. The main advantage of such an instrument is that the tax advantage has a wide reach, it is user friendly, very predictable, and reduces the R&D cost directly when executing the R&D. Furthermore the federal government has also launched a tax credit for R&D investments and a ‘tax-free’ innovation premium for innovation-workers.
Given the present evaluation of the existing and new R&D tax incentives, it is necessary to rethink the existing mix of tax measures to reach more R&D-active companies in Belgium. As such, it seems crucial to make the investment deduction facility more transparent and predictable and to make it complementary to the new tax exemption from withholding tax. It should be also emphasized that Belgian authorities have to collect better statistics about the use of this kind of instruments in order to make it possible to quantify the effects of those instruments.