This blog was first published by the OECD
Income-based tax incentives for R&D and innovation (IBTIs), such as patent boxes or innovation boxes, reduce the tax burden on the income that firms generate from their innovation activities. They have become part of many governments’ innovation and tax support policy toolbox, with more than half of OECD countries offering IBTIs in 2023. This blog highlights five need-to knows about these incentives – the key categories of IBTIs, and their use, design, generosity and cost to governments – drawing on the latest OECD evidence in this area.
What are income-based tax incentives for R&D and innovation?
Income-based tax incentives (IBTIs) provide a preferential tax treatment to the income from R&D and innovation related efforts in the form of a reduced tax rate or tax exemption. They target the outcome of the R&D activity, in contrast to expenditure-based tax incentives such as R&D tax credits, which target R&D expenditures, i.e. R&D inputs. The implication is that in the case of IBTIs tax benefits are only conferred to successful R&D investments.
There are two broad categories of IBTIs: Intellectual Property (IP) tax regimes and dual category tax regimes. IP regimes provide preferential tax treatment solely to the income that is attributable to specific IP assets. Dual category regimes provide preferential tax treatment to the entirety of business income (i.e. including non-IP income) of eligible businesses that are deemed to be engaged in R&D or other innovation-related activities.
The Deduction for Innovation Income in Belgium and the Patent Box in the United Kingdom are examples of IP regimes, whereas the Merit-based Incentives for Competitiveness Enhancement in Thailand that entail tax exemptions for R&D businesses is an example of dual category regimes. IP regimes represent the most common type of IBTI, accounting for 73% of IBTIs in OECD countries and 90% in the EU area in 2023.
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