Tomillo Centre for Economic Studies

Taxation of R&D and innovation

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Fiscal incentives are currently one of the financial instruments most used in scientific and technology policy, not only in Spain but in developed economies as a whole. One of the advantages of fiscal incentives is their neutrality, given that they are applied in a general way, without interfering in project selection, while other instruments, such as grants, are directed towards particular companies, sectors or projects. The statistics available on the taxation of R&D and innovation, stemming from the OECD, reveal that, in the 90s, developed nations have shown a general tendency towards improving fiscal incentives for spending on R&D. Furthermore, Spain is one of the countries with the greatest fiscal incentives: in Spain in 1999, for each dollar spent in large companies 0.31 dollars of fiscal aid was provided, while in other developed nations for which data exists, such aid was less than 0.2 dollars. To find out more about this, refer to the fourth volume of the tecno-logica collection, in the section "to find out more", on this portal.

There are different types of fiscal incentive and, in general, they all tend to be used to a greater or lesser extent by developed nations:

· Deduction of current expenditure on R&D from taxable profits. It should be pointed out that this deduction is made in almost all developed nations.

· Accelerated depreciation of certain fixed assets.

· Fiscal credit: deduction of the R&D spent in the total tax liability.

As in many OECD countries, in Spain during recent years there have been certain changes in the way innovation is taxed, with the clear intention of promoting R&D and innovation in companies. In Spain, the fiscal treatment of innovation was laid down in Law 43/1995, dated 27 December, regarding Company Taxation. Subsequently, with the publication of the R&D and Innovation National Plan, some fiscal improvements were incorporated into Law 55/1999, dated 29 December, regarding Fiscal, Administrative and Social Order Measures. Further fiscal alterations have been introduced by:

· Law 6/2000, dated 13 December, which approves urgent fiscal measures for stimulating savings within the family and small and medium-sized businesses.

· Law 13/2000, dated 28 December, covering the General State Budget for the year 2001.

· Law 24/2001, dated 27 December, covering Fiscal, Administrative and Social Order Measures and their modification on 2 April 2003.

These new measures may be summarised thus:

· Extension of the R&D concept

· New incentives for technological innovation, which was not previously taken into account.

· Larger deductions and additional deductions.

· The opportunity to make queries linked to the Taxation Agency.

· A new deduction for promoting information and communication technologies.

· A new deduction for spending on staff training on using new technologies.

· Deductions for donations made to specific research bodies and institutions.

· Certification for R&D and innovation projects.

Below we show a table summarising the deductions and other fiscal incentives used in Spain to promote spending on R&D and innovation, together with the current limits and other issues which need to be considered. For more details, please access the text of the laws mentioned previously or the Guide to Fiscal Incentives for Science and Technology of the Ministry for Science and Technology (MCYT), available on their website.

Chart summarising taxation of innovation
CONCEPT	FISCAL TREATMENT
DEFINITION OF R&D	After new changes, the concept of R&D with the right to deductions was extended to include advanced software, the formulation of research results into a draft plan or design, the creation of a first, non-commercial prototype and initial demonstration projects or pilot projects, providing that they cannot be converted or used for industrial applications or for commercial exploitation. R&D and technological innovation expenditure is deemed to be the expenditure made by the businessperson, including the depreciation of the assets involved in these activities, to the extent that they are related to such activities and are effectively applied to their implementation, specifically tailored per project. Companies may request a report from the MCYT on how to meet the legal requirements of projects which may be considered to be R&D and innovation.
DEDUCTIONS FOR R&D ACTIVITIES	The deduction base will comprise the sum total of R&D expenditure and any investments in tangible and intangible fixed assets, excluding buildings and land. Deduction of 30% of the total tax liability Deduction of 50% for the excess above the average R&D expenditure in the last two years. A further deduction of 20%, from 2004, for research personnel expenses and for projects contracted with universities, public research bodies or Innovation and Technology Centres. Deduction of 10% of investments in tangible and intangible fixed assets, excluding buildings and land, providing that they are dedicated exclusively to R&D activities.
TECHNOLOGICAL INNOVATION	For deduction purposes, this includes spending on technological innovation activities ( activities which result in obtaining new products or production processes, or in substantial, technologically significant improvements over the current processes). Deduction of 15% for projects commissioned from universities, public research bodies or Innovation and Technology Centres. Deduction of 10% for costs associated with industrial design and production process engineering, the cost of acquiring advanced technology (patents, licences, know-how, and designs) and the cost of obtaining certification for achieving quality standards.
QUERYING THE TAXATION AGENCY	The businessperson may make queries that are connected with the Taxation Agency The businessperson may reach prior agreements with the Taxation Administration
DEDUCTION FOR PROMOTING NEW TECHNOLOGIES IN SMALL COMPANIES	Deduction from the total tax liability of 10% of the cost of adapting to new technologies: Internet access, Internet presence, E-business, and the incorporation of information and communication technologies into business processes. This deduction is only valid in organisations with a turnover of less than 3 million euros. Moreover, the deduction will be incompatible with other deductions for the same expenditure. The element that is financed through subsidies is non-deductible.
DEDUCTION FOR TRAINING PERSONNEL TO USE NEW TECHNOLOGIES	Deduction of 5% of the cost of professional training from total tax liability, reduced to 65% of the amount of the subsidies received. As from 2004, this deduction will be 20% for the excess above the average costs of the last two years. These deductions are also applied to the cost of training personnel in the use of new technologies, reduced to 65% of the total subsidies received.
THE COST OF OVERSEAS R&D	R&D and technological innovation costs can be incurred abroad and these will be deductible providing that costs abroad do not exceed 25% of the total costs.
SUBSIDIES	The base for deducting the costs of R&D and technological innovation will be reduced to 65% of the subsidies received.
DEDUCTION LIMITS	The limit of deductions which give incentives to undertake particular activities (R&D and technological innovation, promotion of information and communication technologies, exports, investments in cultural assets, cinematic productions, book publishing, professional training, employment creation for disabled people) is 35% of the total tax liability or 50%, after 2004, if the deduction for R&D, technological innovation and promotion of information and communication technologies exceeds 10% of the total tax liability. The amounts that are not deducted which relate to the incentives for undertaking particular activities may be applied during the next 5 years. The amounts that are not deducted for R&D, technological innovation and promotion of information and communication technologies may be applied during the next 10 years. In 2004, the deduction base for the acquisition of patents, licences and designs will go up from 500,000 € to 1,000,000 €.
DEPRECIATION	The following may be depreciated freely: tangible and intangible fixed assets (excluding buildings) dedicated to R&D activities and R&D costs activated as an intangible asset. Buildings can be depreciated in equal parts over a period of ten years.