23 May 2002 • Tax Incentives for Research and Development • Gernot Hutschenreiter

Both direct government aid and fiscal incentives for research and development have distinctive advantages and disadvantages. An appropriate mix adjusted to prevailing conditions may increase the efficiency of the system of government aid. As a matter of fact, the majority of OECD countries provide support to R&D both through direct subsidies and, increasingly, by means of tax incentives. At present the EU is paying greater attention to fiscal incentives for R&D than it did in the past.

For a considerable period of time, Austria has been offering an instrument of fiscal support to R&D – the R&D tax allowance – that is rather generous by international standards. However, the R&D tax allowance shows some weaknesses. The recent reform of fiscal aid for R&D is designed to eliminate some of these weaknesses by additional measures (a new R&D allowance for R&D expenditure based on the OECD definition, a research premium for firms that do not manage to make sufficient profit). This reform of tax incentives for R&D does not leave any firm worse off than before. On the other hand, it means that the system of tax incentives is becoming increasingly complex, which in turn tends to increase the costs of administration and compliance by firms. Also, for the purpose of marketing Austria as a good business location, an easily understandable design of available tax incentives would be preferable. Until now the actual use and effects of the R&D tax allowance have not been very transparent and no evaluation has been presented so far. Therefore, it is recommended to increase the transparency of fiscal aid for R&D and to evaluate the newly designed set of instruments according to international standards after they have been in use for three years.

For further information, please refer to Mr. Gernot Hutschenreiter, phone (1) 798 26 01, ext. 238.