On December 31, 2013, the U.S. Federal Research and Development (R&D) Tax Credit sunsets. Again.
This time of year, every year, CFOs of Fortune 500, middle-market and small businesses wonder whether the U.S. R&D credit that they count on and budget for will be around for the next year. Executives, like you, wonder because the 31-year-old tax credit still isn’t permanent. And while that’s a problem, it isn’t the only problem with the credit. In fact, it’s hobbled in four different ways, which jeopardizes U.S. global competitiveness against countries like Russia, China, Canada and Ireland.
Combined, the four factors, the annual expiration of the credit, the alternative minimum tax (AMT) limitation, low percentage rate and methods of calculation, have contributed to our tax credit’s fall from being the number one R&D Tax Credit in the world to being the 24th. And when you figure in that other countries combine their R&D tax credit with low corporate tax rates, the deck is stacked against the U.S. for continuing to attract multinational companies to its shores or even keeping intellectual-property-rich companies here.
For example, Ireland began offering an R&D tax credit in 2004. U.S. foreign direct investment (FDI) in Ireland jumped between 2000, when U.S. investment was $127 billion, and 2011, when it was $243 billion. In 2011, according to AmCham, U.S. foreign direct investment was 74 percent of Ireland’s inward investment. And Ireland has explained that it is looking to attract not just large U.S. FDI but middle-market and small companies too, which could start to eat into America’s major engine of job growth, entrepreneurial businesses.
It is imperative that Congress address the restrictions hemming in the U.S. R&D Tax Credit, so that more companies of all sizes can benefit from it. Removing the constraints will make the U.S. more competitive globally.
Today, 27 of the OECD’s 34 countries not only offer an R&D tax credit or incentive, but 13 of these countries also have increased the “generosity” of their credits over the past seven years, while the U.S. has remained static.
That stagnancy is a mistake. When bundled with access to markets, talent pool and stable governments, an R&D Tax Credit attracts multinational companies to locate operations in a country. Furthermore, the research and development field is known for creating high-paying jobs. Intel, for example, reportedly pays its R&D employees in Ireland on average €79,482 (about $100,000) annually. That wage is a typical amount for this type of work. More jobs and more high-paying jobs are a by-product of a healthy R&D tax credit.