The role of Global Incentives and Credits has never been more important as Governments and businesses plan their economic recovery through the second half of 2021 and onwards into 2022. In a continuously evolving global environment of travel restrictions, lockdowns and border closures, and the gradual rollout of vaccines the connectivity of global business remains more apparent and more important than ever.
For global middle market companies, it is essential to consider:
- The critical role that new products and services, systems and technology will play in the future of the business and the continued acceleration in the speed of business change.
- The economic recovery will not be a straight line, and therefore supply chains will need to be robust, and flexible so they can deal with future global, regional, industry and local upheavals.
- Business innovation and growth will be essential to the recovery, so companies should continuously assess their eligibility for Government incentives, grants, and other tax concessions.
- A global approach will ensure businesses are best placed to take advantage of opportunities for global incentives and credits wherever they arise via sharing international expertise, and through the development of technology, systems, and processes that can support business activity wherever located.
At RSM our approach is firstly to understand the global objectives of our clients, and then to bring together our international experts to work alongside our clients to meet the project needs. Our team members comprise a mixture of accounting, tax, scientific, technical and sector specialists. We will work with you to optimise the business’ entitlement to applicable global incentives and credits, whilst also ensuring due compliance with technical requirements along with preparation and maintenance of all required documentation.
Our global incentives and credits capabilities include:
- International structuring of intellectual property, and R&D functions within a corporate group
- Considering the availability of innovation incentives in a range of countries to ensure that companies maximise the support available.
- Assisting with applications for Research & Development tax relief.
- Advising on accessing particular “IP Box” regimes (preferential rates of tax applied to profits derived from the exploitation of Intellectual Property), for example the UK Patent Box regime and the recently announced Patent Box regime to be launched in Australia in 2022.
- Identifying additional applicable opportunities for other credit and incentive programs and facilitating discussions with appropriate professionals.
- Managing Capital Incentives (fiscal depreciation) and other property related claims, and
- Ensuring all potential Government grants are considered as part of the above analysis.
Global IP tax strategy
The starting point for international groups is to determine the commercial requirements of the business, part of which will be to decide where to locate certain functions, including the undertaking of R&D, and the subsequent retention and exploitation of resultant IP. Whilst tax regimes and treatment are undoubtedly important, it should always support the commercial decision rather than dictate it.
In deciding such a structure, it is crucial to consider the international tax position fully, to include detailed transfer pricing work to ensure that functions and risks are mapped, and that income, expenses and profits are correctly attributed to the respective country.
1. Research and Development
Our Research & Development (“R&D”) professionals can assist you with:
- Reviewing the eligibility of R&D claims in relation to new products and services, and new ways of doing business.
- Considering the eligibility of your activities for Government grants and other concessions.
- Understanding the detailed R&D rules and capturing and reporting the relevant data as required.
- Development of information systems to support future data collection.
- The application of sector specific specialist knowledge to your claim.
- The detailed preparation of R&D claims for submission to the relevant Revenue Authorities.
- Undertaking a risk assessment of current or prior period claims to mitigate the audit risk attaching to claims, and developing a risk management framework for future claims.
- Assisting with tax audits and enquiries, or other interaction with the local tax authorities.
- Updates on the latest legislative and administrative changes that apply to the R&D system.
2. Innovation Reliefs - Intellectual property and digital technology
The increasing importance of intangible assets means that increasingly many countries are focused on the introduction of tax concessions (such as patent box tax relief) that support the development of the digital economy.
These ‘IP Box’ regimes vary from country to country, and often interact closely (albeit usually mutually exclusive) with the R&D tax incentives. Typically, they will offer a reduced rate of corporation tax for profits derived from the exploitation of qualifying IP, and as such, are designed to encourage companies to hold their IP in such countries.
Our specialists can assist you in assessing eligibility for such regimes, and in the subsequent quantification and submission of a claim to the local tax authorities.
3. Capital incentives
The massive economic disruption caused by Covid-19 has in turn impacted the commercial property sector whether retail, hospitality, infrastructure, or office space. As businesses review their plans and adapt to changed property requirements a deep understanding of the potential tax consequences of capital expenditure will be critical to effective decision making. It is likely this will be aligned with changes in tax legislation as governments seek to re-invigorate their economies and adapt to the revised nature of property use that will occur post the pandemic.
Our global capital incentives teams work together with clients in relation to the tax reliefs available on commercial property. Different terminology is used around the world (variously termed capital allowances, cost segregation or fiscal depreciation) to refer to the tax concessions that are available for expenditure incurred by business on its buildings and related assets.
Our best practice technology allows RSM to work with our clients to capture the relevant data and focus on key risks and objectives. This provides a leading platform for not only analysis of historical claims but active business planning of future capital expenditure programmes.
Frequently Asked Questions (FAQs)
The details will depend on the specific country in which the activities take place, but the majority of countries derive their definition from the ‘Frascati Manual’, last updated in 2015 by the OECD which identifies that R&D will typically have a set of common features, such that eligible activity will be:
Transferable and/ or reproducible
Such incentives are designed to encourage businesses to innovate, to take risks in challenging existing understanding in the pursuit of new knowledge. Beyond that, each territory will have its own particular definitions and eligibility criteria to assess whether a company can claim such reliefs in the relevant country.
Our R&D tax professionals will apply their deep experience in supporting companies of a wide variety of types and sizes in making successful R&D tax relief claims, and help you understand what types of activities meet the qualifying criteria.
It is likely, given the experimental nature of R&D activities, that the commercial benefit from activities may not be immediately realisable or initial experiments need to be reset and reworked due to information received from the first rounds of testing. In addition, often it is only after the early stage testing that economies of scale emerge, and the business can turn profitable.
To support innovation, especially in early-stage activities, there are, in most countries specific rules designed to ensure, that even for companies that are in tax loss, there incentives available for R&D. These may take the form of refundable tax credits, offsets against other taxes, the ability to sell or transfer credits, or the ability to carry forward or backward the tax credits.
The availability of R&D tax reliefs will depend on the nature of the activities that have taken place and will generally not be limited by industry or sector.
Likely industries include the more traditionally innovative sectors, such as manufacturing, technology, pharmaceuticals and engineering, but also other less obvious sectors including construction, health and beauty, financial services, food and drink and retail.
Documentation is required to support R&D claims. Although the requirements vary by country, in all cases the documentation needs to be developed during the performance of R&D and include costing and technical documents. Costing information includes salary information as well as contactor and material invoices. Technical documentation can include:
- Project planning documents
- Records of resources allocated to the project
- Design of experiments
- Project records
- Design, system architecture and source code
- Records of trial runs
- Progress reports, minutes of project meetings
- Test protocols, test data, analysis of test results conclusions
- Photographs and videos
- Samples, prototypes, scrap, or other artefacts
Our experienced R&D professionals can advise you on practical ways to maintain the appropriate level of documentation without adding additional administration to your business and propose new tools or systems to ensure documentary evidence in specific jurisdictions are met.
This will be country-specific, but many countries have either different regimes, or varying level of benefit dependent on a company’s size. The general principle is that R&D tax reliefs are designed to encourage innovation, involving a company challenging itself, leaving its comfort zone, and taking risk in developing new knowledge.
Smaller businesses are typically less capitalised and may find it more difficult to access funding at critical points in their development – hence it is often the case that these businesses can access a greater level of R&D support.
While there are similarities across credit and incentive regimes, like all aspects of unique country and locality R&D programs, the requirements to file and claim the credit is country specific. There are many countries which require no pre-approval, and the credit is simply claimed alongside an annual tax return or other administrative filing. Likewise, there are regimes which require either formal pre-qualification or offer this as an optional milestone to provide more certainty to the taxpayer prior to submitting an application.
RSM specialists in respective locations are familiar with the applicable requirements in order to evaluate taxpayer activities to determine potential qualification as well as to efficiently facilitate the process for taxpayers to take advantage of the opportunity.
Unlike grants, R&D tax programs operate as a tax credit which typically reduces the income tax a company is due to pay and in certain circumstances may be refundable. As mentioned, it is a broad-based (i.e., non-sector specific) entitlement program, so unlike a merit-based grants system whereby companies may be awarded grant funding based on the strength of their application and in competition with other applicants, the program is based on self-assessment. This means a company self-assesses (with the assistance of an R&D advisor) whether they might qualify and the extent to which their activities and associated costs are eligible. Broadly, what this means is that if you are undertaking eligible R&D activities, you are entitled to make an R&D claim.
In addition, where the R&D tax credit is refundable, in most cases this is non-assessable income unlike grant income which is usually taxable.