The world’s richest countries are increasingly offering tax benefits to encourage multinational companies to invest in research and development, at the expense of innovative SMEs, according to a new report.
"Supporting Investment in Knowledge Capital, Investment and Innovation," a report by the Organisation for Economic Cooperation and Development (OECD), found that 27 of the organisation’s 34 members provided tax incentives to support business R&D during 2011, more than twice the number offering such incentives in 1995.
Such tax incentives are popular because they enable governments to assist companies without giving direct state aid.
European countries have increased the proportion of tax incentives they offer companies for R&D since 2006, according to the report, with sweeteners accounting for more than half of such incentives in Austria, Belgium, France, Ireland and the Netherlands.
Multinationals use research incentives for elaborate tax planning
But such tax incentives benefit large multinational enterprises (MNEs), according to the report, at the expense of smaller, potentially innovative and job-creating companies.
The global companies slot R&D incentives into their broader corporate tax strategies. “All of this has made it easier for MNEs to shift profits among tax jurisdictions and harder for tax authorities to establish where profits have been earned and to tax them accordingly,” the report says.
The OECD also recommended that changes to the international tax systems were necessary “to address the gaps and loopholes that enable MNEs to achieve double non-taxation.”
The influential Paris-based think tank claims that tax incentives offered to MNEs are not likely to yield as many jobs as measures to assist smaller companies, since the majority of job losses in the wake of the financial crisis arose from downsizing larger firms. Smaller firms, however, have been shown to drive job creation.
Europe failing to convert research into commercial products
The report was launched at the 2013 Innovation Summit, organised by the Lisbon Council, a Brussels-based think tank.
European Council President Herman Van Rompuy identified the failure to commercialise research and lagging ICT technologies as key problems affecting innovation in Europe.
“It’s about more than R&D: it’s about how we think beyond the R&D. How we make sure it has a real multiplier effect, how we draw the best from its potential. And that is precisely what European leaders are focusing on at the European Council [in October],” said Van Rompuy.
Meanwhile the Lisbon Council presented a document called “Plan i: Innovation for Europe”, in which the authors proposed seven key recommendations. These included backing smaller innovative firms, using the model of the US Small Business Innovation research programme, and harnessing big data.