Abstract:
EU businesses underinvest in R&D which is a driver of economic growth and productivity. While the world is becoming more R&D-intensive, the relative weight of the EU is decreasing, mainly due to the rapid rise of China. Taxation has been increasingly used to stimulate investment in R&D. A recent proposal for a Common Consolidated Corporate Tax Base (CCCTB) across the European Union (EU) includes an R&D incentive. This paper presents the rationale for the inclusion of R&D provisions, quantifies the subsidy implied by alternative options using the user's cost approach and approximates aggregate impacts by means of simple extrapolations from elasticities found in literature. We find that the CCCTB without an R&D incentive would significantly deteriorate incentives to invest in R&D. We present alternative options and argue that the level of support should be ambitious to address the pressing need in the EU to invest more, stay globally competitive and reach the EU's target of investing 3% of its GDP in R&D. Importantly, to take full advantage of the opportunities offered by this tax reform, EU member states will have to coherently mobilise a range of policies and engage in complementary non-tax interventions in their national innovation systems. We conclude with a broad consideration of what these may be for the varied and variably developed business innovation capabilities found across the EU.