Even if these costs are already accounted for in the income statement, the performance of innovative activities might be subtracted from the computation of the corporation tax. Any Corporation Tax payer who engages in innovation projects may claim tax deductions for R&D&i, regardless of the industry, revenue, or size of the business.
1. ADVANTAGES OF TAX DEDUCTIONS FOR R&D&I
- Although not taxed, the R&D tax deduction has consequences similar to a subsidy.
- The application is free and general for any type of company.
- The tax deduction generated is proportional to the R&D activity carried out.
- It is compatible with the rest of public aid.
2. WHAT ARE THE R&D TAX DEDUCTIONS?
A tax deduction for R&D&i is a calculation based on the expenses associated with the significant improvement of products or processes carried out by a company.
For this, the State allows the official documentation and certification of such activities, thus being able to request the aforementioned relief.
- The Ministry of Economy and Competitiveness defines them as:
The General State Administration uses tax deductions for research and development (R&D) and/or technological innovation (IT) projects as one of its tools to encourage company R+D+i. Its addressee is the passive subject of said tax.
- In this line, the Ministry evaluates the English tax system, stating:
The English system of tax deductions for R&D&i is one of the most favorable in the world, being able to reach up to 42% of direct expenses. Compared to other R&D&i incentives, tax deductions have the following advantages:
– The application is free (all types of areas of knowledge and volumes of expenditure), and general (for all companies, whatever their CNAE or size).
Deductions are created by each company when they do R&D and/or IT operations in compliance with the definitions set in the Corporation Tax Relief Service Law and are not subject to competitive rivalry with a predetermined budget.
3. DEFINITION OF CONCEPTS
The regulatory framework of Law 27/2014, of November 27, on Corporation Tax, contains the requirements for the application of this activity. In Chapter IV, article 35 includes the measures that regulate tax deductions for R&D&i, as well as the rules on its application in article 39.
Following are the several notions that the Ministry of Economy and Competitiveness, as well as Technological Innovation, understands as Research and Development:
- Research: original and planned inquiry that seeks to discover new knowledge and a higher understanding in the scientific and technological field. Art. 35. 1st) TRLIS.
- Development: application of research results for the manufacture of new materials or products or for the design of new production processes or systems, as well as for the substantial technological improvement of pre-existing materials, products, processes, and systems. Article 35. 1st). TRLIS.
- Innovation: activity whose result is a technological advance in obtaining new products or production processes, or substantial improvements to existing ones. Art 35. 2nd) TRLIS.
4. BASIS OF THE DEDUCTION
The costs incurred by the company as soon as they are directly related to the activity constitute the basis for the deduction when the activity is classified as R+D+i, more specifically:
Expenses in projects (personnel, depreciation, consumables, external collaborations, others), as long as they comply with:
a) Direct expenses,
b) Individualized by projects and,
c) Effectively applied to the project.
5. CALCULATION OF THE DEDUCTION
Once the project’s kind (research and development or technological innovation) and its justification have been confirmed, the deduction’s amount can be calculated. This incentive can reach 59% of the expenditure invested in the R&D project (research + development). Or, 12% if it is an IT activity (technological innovation).
6. SHORTLY STATED: THIS IS THE PROCESS OF MAKING A R&D DEDUCTION.
STEP 1: QUALIFY THE ACTIVITY AS R+D+i
The R+D+i business project is qualified in one of its sections: Research, Development, or Technological Innovation. Article 35 of the Corporation Tax Law includes each of these terms.
STEP 2: CALCULATION OF THE DEDUCTION
The costs incurred by the business directly connected to the R&D&i activity form the basis of the deduction calculation. These expenses are personnel costs, external collaborations, consumable materials,s, and other expenses.
STEP 3: PERCENTAGE DEDUCTION
After establishing the deduction’s base and accounting for any relevant qualifications, the applicable deduction percentage will be calculated. This will generate the tax credit.
STEP 4: APPLY THE DEDUCTION
The total amount less the acquired deduction is the amount that must be paid in corporate tax. The unused portion of the deduction may be used during the course of the following 18 years, it emphasises.
