International Conference on European Integration 2018 Ostrava, Czech Republic
1225
Indirect R&D Support as a Tool for Enhancing Innovations:
the Case of the Czech Republic and the Netherlands
Soňa Raszková1, Viktorie Klímová2
Masaryk University1, 2
Faculty of Economics and Administration
Department of Regional Economics and Administration
Lipová 41a, Brno, 602 00
Czech Republic
e-mail: 405401@mail.muni.cz1
, klimova@econ.muni.cz2
Abstract
The main advantage of the indirect support for research and development is that this type of
support is not selective and each company that meets the legal requirements can use it for
financing of its research and innovation activities. Thus, this support is more compatible with
economic competition. It also represents one of the means to reach the Europe 2020 target in
the field of research and development and most of the EU countries use it. This paper deals
with indirect support for R&D that is used for promotion of innovation activities in the Czech
Republic and the Netherlands. The aims of the article are to compare indirect R&D support
in both countries, to provide new empirical evidence on using this type of support, and to find
some inspiration for the Czech Republic from the Dutch example. It has been observed that
this instrument is used in different ways in both analysed countries. The Netherlands has more
experience with tax incentives and the impact of the support is regularly evaluated.
Keywords: Czech Republic, European research policy, indirect R&D support, Netherlands,
tax incentives
JEL Classification: H25, O38, R12
1. Introduction
Innovations are generally perceived as a decisive factor for competitiveness of enterprises and
for socio-economic development of regions and countries. They represent a way to achieve
economic growth, productivity increase, new jobs and wealth creation. Research and
development (R&D) is one of the most important sources for innovations, particularly the
radical ones, because it brings new knowledge that are vital for revolutionary innovations with
high value added (Žítek, 2014; Halásková et al., 2016). The importance of innovations for
economic and social development was also confirmed by the Europe 2020 Strategy (European
Commission, 2010) and an increase in expenditures on R&D is the main way to improve the
innovation performance and competitiveness of the European economies. The EU2020 target
is to invest 3% of GDP in research and development in 2020 and member states determine
their own targets. The most innovative countries invest more than 3 per cent of GDP in R&D
now and a significant part of it is financed by enterprises. The role of public support is to boost
private expenditures on R&D and the countries that are the innovation leaders put a strong
emphasis on innovation and research policy (Gál, 2014; Mynarzová and Štverková, 2015).
In the scientific literature, public interventions are justified by the neoclassical argument about
market failures (Arrow, 1962) and the institutionalist argument about systemic failures
(Woolthuis et al., 2005). The market failures and imperfections discourage companies from
International Conference on European Integration 2018 Ostrava, Czech Republic
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investing in R&D (Bronzini and Piselli, 2016). Results of R&D have a character of a public
good, because knowledge is regarded as non-rival and non-excludable goods (Arrow, 1962).
New knowledge cannot be fully appropriated and due to knowledge spillovers (Fischer et al.,
2009) the firm’s rivals may be able to free-ride on its investment (Aerts and Schmidt, 2008).
It decreases private rate of returns of R&D for the company that invested in R&D. On the other
hand, creation and diffusion of new knowledge is vital for the development of society. The
decrease in private investment means that the level of R&D expenditures is below the socially
desirable optimum (Brown et al., 2017). The systemic failures are discussed in the concept of
innovation systems and they are comprised of infrastructural, institutional, interaction and
capabilities failures (Woolthuis et al., 2005).
Research projects in businesses can be supported in a direct or an indirect way. The direct way
is usually based on providing subsidies to companies in tenders. The less frequent way is
providing favourable bank loans or guarantees. The indirect support for R&D usually lies in
some type of tax incentive (see table 1). This paper deals with the indirect support of R&D in
the Czech Republic and the Netherlands. The Dutch Promotion of Research and Development
Act (WBSO) was introduced in 1994, with the aim to stimulate research and development
growth. The argument behind WBSO was the classical market-failure discussion, as well as
the concern about the high labour costs in the Netherlands that had a negative impact on the
business environment (Verhoeven et al., 2012 in CPB et al., 2014a). In the Czech Republic,
indirect support of R&D has been provided since 2005 in the form of expenses as deductible
items from the tax base of income tax.
The aims of this article are to compare indirect R&D support in both countries, to provide new
empirical evidence on using this type of support, and to find some inspiration for the Czech
Republic from the Dutch example. Empirical data for our research come from European
Commission, OECD, Eurostat and Czech and Dutch administrative resources. The comparison
of both countries is carried out with respect to the setting of the tax incentive system, extent of
use of the indirect support by enterprises, and the evaluation of public intervention impacts.
2. Tax Incentives for Research and Development
The indirect support for R&D has some advantages as well as disadvantages in comparison
with the direct support. Czarnitzki et al. (2011) recommended providing the indirect support
rather than the direct type. They pointed out the government failure that is usually connected
with direct support. In the case of indirect support, this risk is minimized. They also stressed
that indirect support is considered to be a neutral form of encouragement to R&D as all
companies, irrespective of the industry, size and innovation activity, can claim it. Tax
incentives are market-based and thus they are considered more neutral than direct support. On
the other hand, it means that the government cannot influence the structure of research and
choice of R&D projects (Elschner et al., 2011). We think that this is true only to some extent.
Some countries have more favourable conditions for specific groups of enterprises, e.g. for
small and medium-sized enterprises, or specific industries, e.g. energy (see CPB et al., 2014b;
OECD, 2018). Some authors argue that private companies use indirect support to implement
projects with high private returns inducing investments with a short-term horizon that would
have been implemented in any case, i.e., without public aid (Crespi et al., 2016).
Berube and Mohnen (2009) argued that companies should combine both types of support. They
found out that companies using both instruments introduce more new products than their
counterparts that only receive the indirect support. Busom et al. (2014) connected the type of
public support with the character of companies. They stated that direct and indirect funding
are not perfect substitutes with respect to their ability to reach firms facing barriers associated
International Conference on European Integration 2018 Ostrava, Czech Republic
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to market failures. Subsidies may be better suited than tax reliefs to encourage companies to
start doing R&D, which is valid especially for young knowledge-based companies. Brown et
al. (2017) tested the relation between indirect support and the character of industry. They argue
that private R&D investment is below the socially optimal level, particularly in high-tech
industries, and that the indirect support is more effective in promoting low-tech R&D, but it is
not sufficient for promoting high-tech R&D. Figure 1 shows a proportion between indirect and
direct support for R&D. The higher share of indirect support can be observed in the
Netherlands. The Czech Republic can be found on the opposite side of the ranking.
Figure 1: Tax Incentive Share of Public Aid for R&D in Selected EU Countries (%)
Note: * data for 2006 and 2014
Source: OECD (2017b)
Table 1: Typology of R&D Tax Incentives in EU Countries
Tax credit Tax allowance
Payroll
withholding
tax
Social security
contribution
Accelerated
depreciation of
R&D capital
Austria (AT),
Belgium (BE),
Denmark (DK),
France (FR),
Hungary (HU),
Ireland (IR), Italy
(IT), Portugal (PT),
Spain (ES), United
Kingdom (UK)
Austria (AT), Belgium
(BE), Czech Republic
(CZ), Greece (EL),
Hungary (HU), Latvia
(LV), Lithuania (LT),
Poland (PL), Romania
(RO), Slovakia (SK),
Slovenia (SI), United
Kingdom (UK)
Belgium (BE),
Netherlands
(NL), Spain
(ES)
France (FR),
Hungary (HU),
Netherlands
(NL), Sweden
(SE)
Belgium (BE),
Denmark (DK),
France (FR),
Lithuania (LT),
Poland (PL),
Romania (RO), Spain
(ES), United
Kingdom (UK)
Source: authors’ own processing based on OECD (2017a)
Experts at the European Commission state that 26 EU countries use some type of R&D tax
incentive (CPB et al., 2014b), whereas OECD (2017b) quote only 22 countries. The difference
is caused by the fact that the EC also analyses states that use tax incentives for acquisition of
intellectual property rights. In our paper, we only deal with tax incentives for research
activities. Table 1 provides an overview of various types of R&D tax incentives that are applied
in EU countries. The most frequent forms of incentives are tax credits and tax allowances.
3. Indirect Support for R&D in the Czech Republic and the Netherlands
As shown in Figure 1, the Netherlands belongs to European leaders in providing indirect public
support for R&D activities. This country is also well-known for its high patent activity and
quite high expenditures on R&D, although some EU countries such as Sweden, Finland and
International Conference on European Integration 2018 Ostrava, Czech Republic
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Austria invest more. Table 2 compares expenditures on R&D in both analysed countries. It can
be surprising that the Czech Republic set out a higher EU2020 target for itself than the
Netherlands.
Table 2: Expenditures on Research and Development
GERD (share in GDP, %)
BERD (share in
GERD, %)
BERD (share in
GDP, %)
BERD (PPS per
inhabitant)
2010 2015
EU2020
target
2009 2015 2010 2015 2010 2015
CZ 1.34 1.93 2.7 39.8 34.5 0.77 1.05 163 267
NL 1.72 2.00 2.5 45.1 48.6 0.83 1.12 282 420
Source: authors’ own processing and calculation based on Eurostat (2017)
In the Czech Republic, enterprises can deduct the expenditures on R&D from the tax base and
in reality, these expenses are deducted twice (KDP, 2017). They are first deducted within the
tax base calculation and for the second time they are deducted from the calculated tax base.
Tax rate for corporate income tax is 19%; therefore, the taxpayer can save up to 19% of the
R&D costs. If the tax base does not cover all expenses, they can be deducted within the three
following years (so called carry forward). Companies have to elaborate their research project
in a written form and submit it together with their tax return to the Tax Office. Enterprises can
ask the relevant Tax Office in advance for a binding assessment whether the project expenses
are really tax deductible. The research project has to identify some element of novelty and to
resolve some technology uncertainty. The second condition for using this type of support is
that the same research project cannot be subsidized by any type of direct public aid. The
innovative company has to decide whether it prefers a direct or an indirect form of support.
Since 1994, the Dutch government has offered the opportunity for companies that perform
R&D-activities to decrease their R&D costs through the fiscal scheme 'Wet Bevordering
Speur- en Ontwikkelingswerk' (WBSO). This scheme is implemented by the Netherlands
Enterprise Agency (CPB et al., 2014b). The WBSO scheme is designed for Dutch companies
as well as self-employed entrepreneurs. Companies performing R&D activities may benefit
from a 32% tax credit (40% for start-ups) of the first €350,000 in R&D wage costs and other
expenses and investments, and 16% for those costs and investments exceeding €350,000. Selfemployed
persons are entitled to a fixed tax deduction of €12,522 (and additional €6,264 for
start-up self-employed persons). The R&D project has to meet the following conditions before
the company can apply for the tax incentive: the proposed R&D activities take place in their
own company, the technological development is new to the organisation, the development is
accompanied by technical problems, the R&D work has yet to take place (companies have to
submit a WBSO application in advance) (RVO, 2017b). Firms are automatically guided
through the process of application by the Agency, which administers the scheme. Application
is carried online and the decision is made within three months. (CPB et al., 2014b)
Comparing both systems we can find several differences (details in table 3). The Czech
Republic uses tax incentives in the form of extra-deductions from the taxable base that exceed
the really invested expenditures. This way can be called a reduction of taxable base. Dutch
companies use a special form of tax incentive, which lies in reduction of costs for personnel.
It means that companies are able to either employ more researchers or to compete successfully
for researchers by offering higher net salaries. (Elschner et al., 2011) Furthermore, special
incentives are provided to self-employed persons. The differences can also be found in the
type of deductible expenses (table 4) and they are related to contracted research and long-term
assets (expenses for acquisition vs. depreciation).
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Table 3: Comparison of R&D Tax Incentive Schemes
Czech Republic Netherlands
Type of scheme
R&D tax allowance
Payroll withholding tax credit for R&D wages /
social security contribution
Deducted from
Taxable income
R&D wage cost and non-R&D wage related
costs and expenses attributable to R&D
Vol-based rate
100%
32% for eligible R&D costs up to EUR 350
thous., 16% above EUR 350 thous.
Incremental rate 10% Ceiling
on amounts
that can be claimed
no yes
Carry forward 3 years Deductible
R&D
expenses
wages and salaries, R&D
services (contracted research),
consumables, depreciation
wages and salaries, consumables, M&E
(acquisition of plant, machinery or equipment
for R&D ), land and buildings (acquisition)
Source: OECD (2017a)
Tables 5 and 6 show the extent to which the indirect support is used by enterprises. However,
it is quite difficult to find some statistical data that would be mutually comparable. In this
respect, the Czech Republic publishes more data than the Netherlands. When looking at
number of companies (table 5), we can state that R&D tax incentives are more popular in the
Netherlands. The increase in their number between 2007 and 2015 is higher in the Czech
Republic, but this can be explained by the Czech shorter history.
Table 5: Number of Companies Using R&D Tax Incentives
2007 2008 2009 2010 2011 2012 2013 2014 2015 Increase
Number of companies
CZ 574 598 634 716 859 1021 1120 1264 1306 228%
NL 13 000 13 450 16 620 19 450 20 530 22 220 22 640 22 970 22 980 177%
Number of companies per million inhabitants
CZ 56 58 61 68 82 97 107 120 124 NL
795 820 1 008 1 173 1 233 1 328 1 349 1 365 1 360 Source:
authors’ own calculation based on CSO (2017), Eurostat (2017) and RVO (2017a)
Table 6 shows the amount of expenses and the amount of indirect support. When we calculate
the volume of tax incentives in USD purchasing power standard (PPS) per inhabitant, we can
observe that the support in the Netherlands is about 4 times higher than in the Czech Republic.
Table 6: Indirect Government Support Through R&D Tax Incentives in 2015
Deductible
expenses
(mil. EUR)
Deductible
expenses
(EUR per
inhabitant)
Volume of R&D
tax incentives
(mil. USD PPS)
Volume of R&D
tax incentives
(USD PPS per
inhabitant)
Tax incentives
(as a % of
GDP)
CZ 492 47 198 19 0.06
NL 3,870 229 1,265 75 0.15
Source: authors’ own processing and calculation based on CSO (2017), Eurostat (2017),
OECD (2017b) and RVO (2017a)
For the sake of completeness, we would like to emphasize that the impact of the Dutch tax
incentives is regularly evaluated by the government, which is not carried out in the Czech
Republic. We can also find several research studies that deal with the Dutch system. The
official WBSO evaluations were carried out in 2002, 2007, and 2012. In general, these
evaluations found out large and significant benefits of the WBSO, indicating that one euro
International Conference on European Integration 2018 Ostrava, Czech Republic
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spent as foregone tax revenue results in around one euro of additional R&D (CPB et al., 2014).
The WBSO has also been proven to be effective in creating absorptive capacity and additional
R&D expenditures, especially among SMEs (Brouwer et al., 2002; Poot et al., 2003). The
study by Cornet and Vroomen (2005) outlined that the WBSO provides large positive benefits
for start-ups. Lokshin and Mohnen (2007) concluded their research by outlining that the
program of R&D incentives in the Netherlands has been effective in reducing the user cost of
R&D and therefore has been successful in stimulating firm R&D capital formation. In terms
of the effect on R&D wages, Lokshin and Mohnen (2008) found out that elasticity between
the effective rate of the Dutch payroll tax withholding R&D tax credit and average R&D wage
is 0.2 in the long run. Lokshin and Mohnen (2012) defined that, on average, ten percent
decrease in the user-cost of R&D capital induced by the tax credit leads to four percent more
R&D capital in the short run and six percent more in the long run.
4. Conclusion
The Dutch system of indirect R&D support has much longer history than the Czech system.
Whereas it has been running since 1994, the Czech system has been provided since 2005. Both
systems differ in their basic elements, because the Czech system has a form of reduction of the
taxable base while the Dutch system focuses on the reduction of the costs for personnel. The
Dutch tax incentives are also available for self-employed persons that carry out R&D activities.
It is the same for the Czech Republic, however, in this case the self-employed persons do not
use that opportunity very often. There is also a practice by the Dutch system of targeting young
start-ups by offering them a preferential rate, which could be inspiring for the Czech Republic.
In the Netherlands, it is very usual and customary to use indirect tax support in contrast to the
direct support. This is mostly because of the historical development of the support system, the
cultural differences, the mentality of entrepreneurs and the character of the business
environment. The Czech Republic lacks behind the Netherlands in this case. This is partly
influenced by the fact that the Czech Republic is eligible for higher support from the Structural
Funds through the Operational Program Enterprise and Innovation (2007–2013) and the
Operational Program Enterprise and Innovation for Competitiveness (2014–2020).
The statistical data concerning the indirect support are well managed and regularly published
by the Czech Statistical Office. The Dutch system does not have the same qualities in these
terms and Statistics Netherlands does not publish relevant data regularly. On the other hand,
the official evaluation of the scheme is missing in the Czech Republic. The Czech Republic
can learn from the Dutch experience of evaluation practices that reinforces better policy
making and policy effectiveness.
The WBSO system is governed by Netherlands Enterprise Agency that aims to help the
entrepreneurs with administration and guides them through the process with available
consultations. In the Czech Republic, the assessment of the application is in the competence
of the Tax Office and the application is submitted together with the tax return. Hence, Czech
entrepreneurs see the rules for the tax reduction unclear, fear sanctions, and therefore are less
willing to use the support. These good Dutch administrative practices can be adopted in the
Czech Republic by offering guidance through the process and by making the system more
transparent to give businesses greater legal certainty.
International Conference on European Integration 2018 Ostrava, Czech Republic
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