6.10 Research and development–based tax incentives for innovation

support for the development of venture capital, and tax incentives or grants to correct market failures that lead to underinvestment in R&D (OECD 2013). Often, measures to support firms to innovate combine both support to capacity and financing, as explained in the subsequent paragraphs.

Policies and instruments to foster greater private investment and inclusion of diverse stakeholders have been applied to varying extents in the region. As discussed in the section “Providing the incentives and breaking the barriers to increase private sector R&D,” significant regulatory and institutional barriers impede firm innovation in developing East Asia. Several measures have been pursued to enable greater private investment and innovation, including R&D-based tax incentives, competitive research grants and support to PPPs, incubators (including IPR protection), and, to some extent, loans and risk capital. networking support is not prominent; however, many instruments aim to engage diverse actors and thereby provide incentives for networking and partnerships.

R&D tax credits hold promise for overcoming market failures. More than two-thirds of OECD members provide tax incentives for R&D. Available evidence on the effectiveness of R&D tax credits is mixed, but they can be an effective mechanism for overcoming market failures resulting in underinvestment in private R&D (Hall and van Reenen 2000). Malaysia, the Philippines, Thailand, and Vietnam offer tax incentives for firms that undertake R&D and provide R&D services, which may also apply to the agri-food sector (box 6.10). Although Indonesia does not have an R&D-based tax incentive scheme, a range of tax incentives are available to Indonesian companies seeking new investments in Indonesia (Ernst & Young 2013; OECD 2017b).

Firms (and other innovators) can also be supported in the early stages to overcome the challenges of creating and commercializing innovations. See box 6.11

Research and development–based tax incentives for innovation

In Malaysia, companies that provide research and development (R&D) services are eligible for Pioneer Status (income tax exemption) or an investment tax allowance for qualifying R&D capital expenditures. A double tax deduction is available for R&D revenue expenditure incurred by companies carrying out in-house R&D or expenditures for the services of approved R&D service providers. There are also a variety of financial assistance schemes.

In the Philippines, R&D expenditures may be treated as a current expense, deductible at 100 percent, or a deferred expense ratably distributed over a period of not less than 60 months, as chosen by the taxpayer. Moreover, the 2012 Investments Priorities Plan identified R&D activities as investment priorities that promote the economic development of the Philippines. Enterprises engaged in R&D activities (as an R&D service provider) that qualify for registration with the Board of Investments may be entitled to a four-year income tax holiday and other incentives.

Thailand provides a 200 percent deduction for the cost of engaging approved Thai R&D service providers with no requirement for foreign-majority-owned companies to own the results of the R&D activities. Companies providing eligible R&D services may also be entitled to other incentives.

In Vietnam, newly established companies in high technology, science, and research domains are entitled to a reduced tax rate for 15 years, which can be extended to 30 years, subject to approval. There is also a one-year exemption for income derived from performing R&D, the sale of products during test production, and products made from new technology applied for the first time in Vietnam.

Source: Ernst & Young 2013; OECD 2017b.