The global tax competition is remarkable in the light of changes in incentives granted by governments in order to attract companies and investments. Research and development incentives (R&D) are at the top of the tax changes and are probably more evident than any of the other categories of corporate tax that are pursued globally, according to a recent EY study on the subject (EY Worldwide R&D Incentives Reference Guide).
The study was conducted by Claudia Sofianu, partner Department of Tax and Legal Assistance, EY Romania, and Gabriel Sincu, associate partner Department for Tax and Legal Assistance, EY Romania
“According to this annual EY publication, 14 out of 41 – or 34 percent of the interviewed jurisdictions – forecast new or more generous R & D incentives in 2018 (compared with only 22 percent in 2017). Moreover, nine of the 14 countries that increased R&D incentives in 2018 are taking measures for the second consecutive year,” shows the study.
Between 2015 and 2017, countries introduced minor changes in tax incentives in the R&D area. In 2018, however, the improvements were significant and much more important. For example, Singapore has increased the tax deduction for labor costs and consumables needed for research and development projects in Singapore from 150 percent to 250 percent; Poland also increased its tax deduction from 100 percent to 200 percent from 1 January 2018.
“Romania seems, at least for the time being, not to place a major emphasis on tax competition in terms of facilities granted in 2018, with no changes or increases for the R & D area,” states the study.
Currently, there are four research and development incentive programs in Romania:
- An exemption from corporate income tax in the first 10 years of activity for companies carrying out exclusively research and development and innovation activities and related activities;
- An additional deduction of 50 percent of eligible R & D expenditure in the calculation of corporation tax;
- An accelerated depreciation of qualified research and development assets;
- A tax exemption on salary income for employees engaged in research and development or technological development.
The eligibility conditions for the exemption from paying the income tax, they have changed, being somewhat less restrictive. But in practice, employees who already applied the tax exemption on wage income in December 2017 were potentially affected by the transfer of social security contributions from employer to employee from January 2018. However, tax legislation brought a leverage to compensate for the net loss of salaries of these categories of employees under certain conditions.
The provisions governing the exemption from corporation tax were introduced in the Romanian Tax Code in January 2017. Unfortunately, until now the rules for the application of these provisions have not been issued.
From a corporate tax point of view, although a large number of taxpayers working in this area know the tax benefits, most of them are still in the process of eligibility analysis, with no clear implementation phase. This is largely due to the lack of consultation of the R & D Expert Registry, the latter being inoperable, although the law provides that the employer, employee or tax authorities may request expert reports drawn up by experts enrolled in the Register of Experts on Domains research and development for the validation of the R & D activities.
The business environment appears to need more confidence in fiscal policy to stimulate investment, like the implementation of R & D facilities closely linked to the National R & D and Innovation Plan. Moreover, the 10-year tax exemption scheme is inapplicable, as there are no implementing rules and a well-founded fear of taxpayers that this measure can be categorized as State aid.
“We consider it appropriate to access tax incentives in Romania where the activities undertaken can justify their innovative character beyond the ineligible nature (e.g. chromatic or aesthetic changes in products, current testing and analysis programs for quality or quantity control). In addition, it is good to know that countries investing in R & D are recovering faster than the crisis,” states the report.
“In order for Romania to no longer rank on the lowest positions in Europe’s innovation rankings, the private sector should be stimulated to invest in technology at all stages of the innovation process (idea, prototype, testing, production). Romania has all the ingredients that allow it to capitalize on this potential, but it remains to be seen if this field will be at the top of the strategic development priorities in the coming period,” concludes the study.