According to data published by the OECD, tax incentives account for nearly 55% of total support for R&D activities in OECD countries. This means that in most OECD countries, tax reliefs for R&D activities exceeds other forms of public support for investment in innovative development and technologies.
The key role of tax incentives for R&D
In 2024, 34 out of 38 OECD countries offered tax relief for R&D expenditure. It is worth noting that Estonia made its debut in this area, introducing for the first time in its history a tax preference for the remuneration of employees engaged in R&D activities. Only Costa Rica, Israel, Latvia, and Luxembourg have not introduced additional tax incentives in this area. In most countries, support for R&D through tax incentives exceeds direct financing. According to OECD data, 23 countries actually provided more financial support to companies engaged in R&D through preferential tax treatment than through grants or other forms of direct support. As a result, across the OECD, tax incentives account for around 55% of total support for R&D, and in China this figure was as high as 85%. According to an analysis carried out in related OECD paper, these estimates reveal differences in the way financial support for R&D is organized and in the objectives pursued by the national administrations of individual countries.
Leaders in R&D support
In 2023, the countries with the highest tax savings on R&D expenditure as a percentage of GDP were Portugal (0.39%), Iceland (0.38%) and the United Kingdom (0.30%), followed by France (0.28%) and China (0.24%). At the same time, taking into account the direct support and tax benefits offered, the leaders in policies supporting economic innovation in relation to GDP were Iceland (0.52%), Portugal (0.46%) and France (0.42%).
Benefits for SMEs
In 2024, profitable SMEs in the OECD area benefited from an average tax credit of 19% on R&D expenditure. At the same time, the average tax support rate for R&D activities for large profitable companies was 16%. The average relief for non-profit-making SMEs was lower, at 16% on average, compared with 13% for large enterprises in the same situation. In 2024, Portugal, France, and Poland were the OECD economies offering the most generous tax incentives for R&D activities for large profitable companies, while Iceland, Portugal, and France provided the highest level of tax relief for profitable SMEs.
Growing importance of tax breaks
The benefits of tax preferences for R&D as a percentage of GDP in OECD countries have been on an upward trend in recent years, from 0.05% in 2003 to 0.13% in 2022. At the same time, the level of direct support for R&D financing has remained stable at 0.10% of GDP over the years. China is an exception, where tax support for R&D activities has more than tripled in recent years, from 0.07% of GDP in 2017 to 0.24% in 2022, while direct support (excluding loans from state-owned banks) has remained stable at 0.05%. This increase appears to be linked to reforms of the tax relief system, such as an increase in the preferential deduction of R&D expenditure for all companies from 50% to 75% in 2018 and for manufacturing companies from 75% to 100% in 2021.
Poland at the forefront
It is worth noting that although Poland does not rank highest in terms of overall intensity of support for R&D activities, it ranks third among countries offering the largest tax reliefs for large, profitable companies engaged in R&D activities, which highlights the important role of tax support for entrepreneurs investing in innovative development.
Tax incentives are now a fundamental instrument for supporting R&D activities and appears to be the most effective tool for driving investment by SMEs. From the perspective of public administration, fiscal policy instruments ensure universal access to available benefits, are easy to coordinate, and do not directly burden government spending. Tax preferences have become the most important and most frequently used channel of support for innovation, surpassing traditional grants and subsidy programs, and enabling the design of economic growth and innovation strategies in most of the world’s advanced economies. It is possible that these trends will change in the coming years, given the inclusion of the largest international companies in the GloBe regulations under the Pillar II directive and the introduction of equalization taxes into national jurisdictions.
