Research and development (R&D) is considered as one of the main means in promoting economic growth and productivity. The tax incentives are one of the possible political instruments to promote innovation.
Although the investments into R&D activities may not be sufficient in the view of the society and determining the optimal investing level is very difficult, many countries implement several policies to stimulate the private sector R&D.
The most popular measures are the direct support mechanisms and tax exemptions. Tax exemptions are more convenient in situations where the government’s goal is the comprehensive R&D promotion in a stable environment, direct support mechanisms are more appropriate with attaining specific goals by giving a clearer result afterwards.
The study’s report consists of four main parts:
- Tax incentives that promote R&D activity in Estonia
- Theoretical overview of countries interventions to R&D activities
- International experience with R&D promoting tax measures
- Estonian R&D expenses compared to the rest of the European Union countries
Most of the tax measures with R&D activities in different countries are aimed at companies that make R&D expenditures to lessen the income tax liability.
The most common of the measures are the enhanced deduction of R&D expenditures. Also, another popular measure is the reduction of corporate labour taxes and the reduction of taxes made on capital gains from the creation of patents.
„Some studies showed that tax incentives enabled to start riskier projects and implement them faster“ – Marek Tiits
Studies made in different countries show that R&D related tax incentives are effective, because the enterprises already implementing these activities make complementary R&D activities. At the same time, no proof exists as to whether the measures affect the location of R&D activities. The choice of location is rather affected by the size of the market, quality of workers, flexibility of the labour market, quality of the research institutes and the legal environment.