A Comparison Of The Effectiveness Of Tax Laws Between Countries For Firms Engaging In Research And Development

Abstract

The creation of new technology is seen as a driver for economic expansion and job growth worldwide.  To encourage firms to innovate, many countries provide tax incentives.  Two such tax incentives are the ability to carry back net operating losses and tax credits for research and development expenditures. 

This paper attempts to answer the question: Do these tax incentives truly lower the average tax rates paid by high-technology firms?  Firms from Canada, Germany, and Japan are examined for the years 1993 to 1997. 

In general, this paper finds that the ability to carry back a loss, or to use the R&D tax credit, does not, in themselves, produce a lower average tax rate than a similar firm within the same country.  However, the more tax options a country produces does lower average tax rates – a larger combination of tax incentives allows firms more leeway towards tax minimization.