Authored by Bryan Soepardi, R&D Tax Specialist at RSM Australia
The rules of global taxation are on the brink of change for the first time in nearly 100 years. The leaders of the Organisation for Economic Co-operation and Development (OECD) G20 met in Rome on October 30th 2021 to finalise the agreement for a global minimum tax. Governments must now consider a range of alternative methods to stimulate business entity research and development (BERD), and successful innovation in the new global tax landscape. In this article, I have considered some of these approaches and how they will impact business.
Subsidizing R&D labour costs
To combat reduced demand for researchers (and associated wage deflation), governments may consider directly subsidizing R&D wage costs through grant programmes or credits against labour-related taxes (such as payroll tax). This may generate a twofold benefit of increasing the expertise of its labour force and encouraging it to fill globally under-resourced technical and research roles.
Building innovation ecosystems
Each “innovation problem” differs in complexity and require different resources to come to a solution. There are several approaches that could be taken to solve different types of innovation problems such as:
- When it comes to sustaining innovations, this can be achieved through acquisitions, traditional R&D labs, and design thinking approaches.
- Basic research is best performed and disseminated through academic partnerships, journals, and conferences.
- Disruptive innovations require venture capital models and innovation labs that allow for rapid and inexpensive testing and re-testing.
Investing in education programmes, collaborative B2B projects, or business/university research projects, and incubator/accelerator programmes may improve both the intensity and quality of R&D activities in a country. A country’s reputation for strong innovation ecosystems and supportive governments will be likely to continue to attract increased foreign investment.
Targeting innovation bottlenecks
The journey of successful innovation can be tracked through four stages:
Each stage of innovation has a unique set of conditions for success, and governments can either create or remove bottlenecks throughout an innovation lifecycle. Countries can support an increased BERD by identifying and removing bottlenecks that stifle innovation through the following approaches:
- Funding collaborative research projects, innovation labs, incubator programmes, or research challenges to support business investment in ideation and iteration.
- Subsidizing the purchase of capital-intensive equipment, acquisition of labour, or the acquisition of property to support innovation. Subsidies might be delivered through property tax relief, labour tax relief, or direct grant funding in favour of capital gains tax exemptions, capital allowances, and other tax incentives linked to income tax.
Revisiting the role of regulation in innovation
There are times when regulation can give rise to business model innovation, disruption, and shared value. For example, the introduction of environmental taxes has resulted in several innovative solutions towards tackling the world’s climate change problem. Funding these initiatives can be challenging, however, specialist investors are opening up new opportunities.
Impact investment companies such as C-Quest Capital are providing developing countries with access to sustainable, modern energy services that reduce greenhouse gas emissions. Such emission reductions can be sold as carbon credits to high greenhouse gas emitters to supplement their broader decarbonisation efforts. Since 2009, C-Quest Capital has reduced CO2e emissions by over 5 million tonnes and improved the lives of over 20 million people through climate finance.
Almost 140 countries have agreed on the 15% minimum global tax rate and associated international tax reforms. With any new rules, its implementation will be fraught with challenges. MNEs and governments would do well to proactively engage and explore how innovation can be resourced and encouraged in the impending new global tax environment.
The next stage of the reform of the global tax system will increasingly need tax incentives to be seen as part of the broader suite of business, regulatory and tax factors that determine where and how new business activities take place.