Special depreciation allowances allow firms deduct more than 100 percent of their current expenditure on R&D.
Tax credit enables firms directly deduct a certain threshold of their current expenditure on R&D from corporate tax. And this kind is the most popular used instrument in many countries (Köhler et al. 2012).
3.1 Target group
What type of company is eligible for support is the crucial question. Target group is used to serve specific-oriented object by policy makers. Therefore, classifying firms based on their characteristics is the design element, which governments must consider when building the policy.
Firstly, small and medium-sized companies can benefit more generosity in tax credit than large firms. Or they can be offer a more flexible feature such as cash refund (Van Pottelsberghe, et al. 2003). The recently established companies meet many barriers to survive and develop in comparison with old firms. Most of countries give preferential for young companies. Because small and medium-sized firms have some disadvantages in comparison with big firms, then they may need to have innovation products to compete. It is necessary to support young firms to increase the competitiveness business environment.
Secondly, as Köhler et al. 2012, the target subjects are classified according to the type of R&D projects, which they pursuit. Even the use of R&D tax incentive for particular sectors is restricted as EU competition law. In some countries, biotechnology is the priority whereas, the other chose laser industry. But doing determination type of R&D project is not easy. It takes administration cost from authority.
Moreover, if firm...
... middle of paper ...
...hoices is selecting the tax base. The options of basic calculation are between a volume-based or incremental base. A volume -based mechanism allow firms benefit from deduction of entire current eligible R&D expenditures. By contrast, with incremental scheme the tax credit is only calculated based on the extra number of R&D expense that exceed a certain base amount (Van Pottelsberghe, et al. 2003). And the reference level usually defined as an average of past expenditure, within 4 years period, for example. It is noticed that tax credit can be positive or negative depend on whether the current level of expenditure is higher or lower than a reference level. In case tax credit is negative, then it will be deductive from future positive tax credit. Besides, there is “hybrid” option, which combines both volume and incremental scheme as the base for tax credit calculation.
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