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Australia Tax: R&D tax credits boosting Australia's attractiveness

Consulting firm finds Australia now the number one nation for R&D investment
by Tim Lohman, 04 June 2021 -- Australia has become the most attractive nation for research and development investment because of a new Federal Government approach to tax credits, according to KPMG, despite controversy about the scheme earlier in the year among IT companies and industry.

In its recent Competitive Alternatives 2010 special report on tax, which assess the general tax competitiveness of 95 cities and 10 countries, the global consulting firm found Australia had now overtaken Canada, the UK, the Netherlands, and Mexico in attractiveness for R&D investment as a result of the new tax credits regime.

In 2008, the Netherlands was ranked first, Canada second, the UK third, Mexico fourth, and Australia fifth.

"Comparing the TTI (Total Tax Index) rankings of countries in 2010 to 2008, the most dramatic change is for Australia, moving up from fifth place in 2008, to first in 2010," the report reads.

"The change is a result of Australia adopting a new R&D tax credit system as of July 1 2010, that is refundable for corporation that meet defined revenue limits."

KPMG defines TTI as a measure of the total taxes paid by corporations in a particular location, expressed as a percentage of total taxes paid by corporations in the US.

Australia's current R&D incentives regime sees R&D expenditure able to be deducted at 125 per cent of the actual amount of the expense, or 175 per cent for incremental expenditures.

The changes from 1 July will see the deduction-based system replaced with R&D tax credits -- 45 per cent refundable credits for companies with group turnover for less than $20 million, and 40 per cent non-refundable credits for large corporations.

"For many R&D operations, such spin-offs from larger firms or university research projects, the potentially refundable nature of these tax credits will represent a powerful incentive to structure within the defined revenue limits," the report reads.

In January the R&D tax incentives came under fire from the Australian Information Industry Association (AIIA), which predicted dire consequences for the local ICT and research industry.

"The proposed amendments… will cause critical diminution in the level and quality of R&D carried out by Australia's SMEs and others because it will be difficult or impossible to sustain the level of financial commitment necessary to support effective R&D," the industry body wrote in its submission.

PriceWaterhouseCoopers also weighed in, describing the new legislation as being a "kick in the guts" for business.

"These proposed changes will slash support for R&D, despite the Government saying it's more generous," national R&D leader, Sandra Mason said at the time.

"In particular, the IT industry is going to be hit hard."

Commenting on the global R&D incentives market, KPMG suggested that governments had little choice but to offer high rebates to industry in order to attract R&D investment to their countries.

"The objective of governments in offering such incentives is to foster the growth of R&D and innovation in their respective jurisdictions," the report reads.

"As more countries compete for R&D dollars, there has almost become and escalating battle of R&D tax incentives."
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