The OECD is calling on governments to reform the use of tax incentives for research and development (R&D) to give more support to young innovative firms, rather than multinationals, in order to boost jobs and provide a better return on investment.
The OECD's report, Supporting Investment in Knowledge Capital, Growth and Innovation says that over a third of all public support for business R&D is via tax incentives. It says multinational enterprises (MNEs) benefit the most, as they can use tax planning strategies to maximise their support for innovation, which the OECD claims creates an 'unlevel playing field' that disadvantages purely domestic and young firms.
Evidence from 15 OECD countries suggests that these firms, which are typically less than five years old, have generated nearly half of all new jobs over the past decade, despite accounting for only about 20% of total business sector jobs, excluding finance.
Young firms often do not generate enough profit to make use of non-refundable tax incentives, so they miss on current R&D support. The OECD says better policies to help them would be cash refunds, carry forwards or the use of payroll withholding tax credits for R&D related wages.
The OECD is already reviewing the tax rules that enable MNEs to shift profits from intellectual assets, such as patents, as part of its Action Plan on Base Erosion and Profit Shifting (BEPS). It now wants governments to undertake their own reviews of national R&D tax incentive schemes, looking at issues such as the scope of eligible R&D and the firms that qualify, as well as considering direct support in the form of grants and contracts.
It also wants governments to assess the tax treatment of large R&D performers, saying that for some countries current schemes may be more costly than intended, particularly as tax relief has become more generous in recent years and the full cost is not always transparent as these incentives are considered 'off budget' as a tax expenditure.
Andrew Wyckoff, OECD director of science, technology and industry, said: 'Much more needs to be done to help young firms play a greater role in driving innovation and creating jobs. They are the future of the knowledge economy and need the same chance to succeed as the major players. Improving their access to finance and making the tax rules fair for everyone is key.'
The OECD also wants countries to review their bankruptcy laws to spur innovation: reducing the stringency of these laws from the highest to the average level in the OECD could raise capital flows to patenting firms by around 35%, according to the report.
