The importance of international R&D tax incentives for the Pharmaceuticals sector

The pharmaceutical industry remains one of the most heavily invested in research and development (R&D), with around 20% of all turnover invested in this area. It is likely to continue to do so.  The R&D response to the COVID-19 pandemic has made headlines worldwide, and the relentless work of pharma companies and research groups continues to support the development of effective vaccines, diagnostics, and therapeutics.

However, the process of bringing new drugs to market is risky, lengthy, complex and costly. As a means of remaining competitive, many big pharmaceutical companies have rationalised their major R&D centres around the world and are looking to collaborate with other partners. Contract Research Organisations (CROs) now play an increasingly important role in the drug development process as their scientific and technical expertise grows and replacing many of the services traditionally undertaken by the internal R&D teams of big pharmaceutical companies.

The importance of international R&D tax incentives

Globalisation of the pharmaceutical industry and increased outsourcing to R&D ‘hubs’ and CROs has dramatically changed the R&D landscape. Moving operations to different international locations and the delegation of certain activities to CROs can significantly impact the R&D tax credits earned by the business.   Understanding the potential benefits, drawbacks and variety of incentives offered across the globe can help companies plan their investment in R&D globally.

The eligibility rules for R&D incentives for most countries are derived from the OECD definition of research and development. Consequently, drug development processes and associated activities will usually qualify for R&D incentives in most countries.  Therefore the ability for an organisation to understand the differences in international R&D incentives become paramount when attempting to find which countries will offer the greatest benefit to the organisation and its activities.

Important factors to consider when examining an R&D incentives regime:

Ease of application

While generous, many international R&D incentives schemes can often be a considerable administrative burden on the business. Therefore the ease of application is a pertinent factor in determining whether an R&D tax incentive in a specific international location is worth pursuing, particular for those fast-growing start-up companies that may not have the resources to undertake detailed applications.

Scope of qualifying expenditure

The broader the scope of costs that a company can include, the greater the opportunity for a business to claim support to invest in a range of activities. Many R&D incentive schemes are often limited to domestic R&D spend or are based on specific costs such as payroll costs and consumables. This will considerably limit the activities on which a company can claim R&D. 

Generosity

There is considerable variability in the monetary value of R&D incentives across the globe. Some R&D incentives provide a reward of up to 40% of the total eligible R&D expenditure identified. Still, the actual financial benefit can vary considerably due to each location defined as eligible R&D activity. This is further compounded by the ease of application, as some countries have complex and strict R&D incentives, offering high headline rewards which are difficult to access. In contrast, others may be less restrictive and less obviously generous but more likely to be successful.

The number of periods in which a historical claim for relief or support can be made:

It is quite common for international R&D incentives to offer relief for multiple accounting periods, which can entice companies with well-established R&D centres that haven’t explored R&D opportunities previously. However, for companies looking to establish or outsource R&D centres into new jurisdictions, any historical costs not related to the new location may not be eligible for relief.

Level of review or enquiry expected?

How supportive is the local Tax Authority to processing claims? Do they have a light tough, or do they see R&D claims as high risk and subject them to greater audit scrutiny.  What is the risk that any review of R&D would be extended to non-R&D matters?  It is therefore important to understand how that Tax Authority will manage the R&D process.

R&D should not be looked at in isolation. With a more diverse spread of R&D functions across the globe, both in-house and external outsourcers, there is a need to make sure any incremental R&D benefits are considered in the whole, taking into account other tax issues such as transfer pricing, hybrid mismatches, controlled foreign companies and withholding tax to name but a few.  In addition, outsourcing (in-house or external) may have a detrimental effect if it means again in R&D credits in one territory but at the expense of innovation reliefs being lost elsewhere.

A failure to undertake a thorough review of incentives for the business may result in the company receiving less than it is entitled, or nothing at all if the various governing body which controls the incentive scheme refuses to grant the application. 

If you want the reassurance that your R&D is getting the credits it is entitled to, then Mazars has an internationally recognised specialist R&D Tax Relief team across 91 countries. We have a breadth of experience in preparing and submitting international R&D tax relief claims for businesses in the pharmaceutical sector. If you would like a free consultation on how we would be able to assist your business, our contact details are as follows: 

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