Harmonization of R&D Tax Credits across the European Union: Nonsense or common sense?

We examine the relevance of R&D tax credits as incentives to spur investment in R&D throughout the European Union (EU) and discuss the relevance and feasibility of harmonizing these tax-based policy instruments across Member States. Based on a thorough investigation of the instruments implemented in five selected European countries (Belgium, France, Italy, the Netherlands and the UK), we argue that the main obstacle to harmonization lies in the great diversity of instruments and eligibility conditions that currently prevail across the EU. We conduct a subsidiarity test, which suggests that, if the EU decides to move towards a harmonized R&D tax credit framework, it should at least impose a minimal level of tax rebate at the EU level, possibly complemented by additional country-level incentives. We highlight that the recent proposal of a Common Consolidated Corporate Tax Base (CCCTB) goes further than this minimal EU-level tax credit, by suggesting to implement a “super-deduction” that would allow EU-based firms to deduce more than 100% of their R&D expenditures from their tax base. We also discuss, as far as the harmonization of R&D tax credits is concerned, possible implication of Brexit both for the UK and for the EU. To complement our reflection and discussion, we develop an econometric analysis on our five selected countries. The super‐deduction proposed by the European Commission (EC) has its roots in the conviction that economic growth in Europe can only be knowledge-based, and that the current level of R&D investment in the EU is too low. The EC hopes that the super‐deduction will boost R&D investment across Europe, which is assumed to be conducive to more innovation and, ultimately, more growth. Our econometric analysis allows us to test whether this hope is empirically grounded, by examining whether the R&D tax credits implemented in the five aforementioned EU countries have spurred R&D and innovation (measured by patenting intensity) between 1980 and 2007. We find that the R&D conducted when a tax credit is available is associated with more R&D in the future in all five countries, and with more innovation in three countries out of five. However, we do not find any causal effect of the tax credit on innovation.