《世界银行：2024韩国研发税收优惠政策的案例研究报告-原则、实践及对发展中国家的启示（英文版）（91页）.pdf》由会员分享，可在线阅读，更多相关《世界银行：2024韩国研发税收优惠政策的案例研究报告-原则、实践及对发展中国家的启示（英文版）（91页）.pdf（91页珍藏版）》请在三个皮匠报告上搜索。

1、A Case Study on Koreas R&D Tax Incentives:Principles,Practices,and Lessons for Developing CountriesPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized 2024 International Bank for Reconstruction and Development/The World Bank1818 H Street N

2、WWashington DC 20433Telephone:202-473-1000Internet:www.worldbank.orgThis work is a product of the staff of The World Bank with external contributions.The find-ings,interpretations,and conclusions expressed in this work do not necessarily reflect the views of The World Bank,its Board of Executive Dir

3、ectors,or the governments they represent.The World Bank does not guarantee the accuracy,completeness,or currency of the data included in this work and does not assume responsibility for any errors,omissions,or discrepancies in the information,or liability with respect to the use of or failure to use

4、 the information,methods,processes,or conclusions set forth.The boundaries,colors,denominations,and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries

5、.Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank,all of which are specifically reserved.Rights and PermissionsThe material in this work is subject to copyright.Because The World Bank encourages dissemi

6、nation of its knowledge,this work may be reproduced,in whole or in part,for noncommercial purposes as long as full attribution to this work is given.Any queries on rights and licenses,including subsidiary rights,should be addressed to World Bank Publications,The World Bank Group,1818 H Street NW,Was

7、hington,DC 20433,USA;fax:202-522-2625;e-mail:pubrightsworldbank.org.World Bank Finance,Competitiveness and Innovation Global PracticeA Case Study on Koreas R&D Tax Incentives:Principles,Practices,and Lessons for Developing CountriesMAY 2024AcknowledgmentsThis document was prepared by a team led by J

8、aime Frias(Senior Economist,TTL),which comprised Yanchao Li(Private Sector Specialist),Kyeyoung Shin(Consultant),and Lucio Castro(Consultant)from the Finance,Competitiveness,and Innovation Global Practice of the World Bank(WB).Arnelyn Abdon(Consultant),Muhammad Fajar Nugraha(Consultant),and Viet Anh

9、 Nguyen(Senior Public Sector Specialist)provided valuable insights and contributed to the comparative analysis between Korea and Indonesia,the Philippines,and Viet Nam.The authors are grateful for useful comments from peers Xavier Ciera(Senior Economist),Anwar Aridi(Senior Private Sector Specialist)

10、,Ralph Van Doorn(Senior Economist),Jonathan Pemberton(Consultant),Joo Sueb Lee(Senior Economist),Justin Hill(Senior Private Sector Specialist),Victor Steenbergen(Senior Economist),Jiyoung Choi(Senior Economist),and Dr.Jae-Jin Kim,President of the Korea Institute of Public Finance(KIPF),for reviewing

11、 specific sections of Korean policy.The authors are also grateful to Zoe Escobar(Assistant)for editorial support.The team thanks the guidance and oversight of Cecile Niang(Practice Manager,FCI),Zafer Mustafaoglu(Practice Manager,FCI),and Denis Medvedev(Director,IFC).The team benefited from useful di

12、scussions of the case through policy discussions with the Department of Finance of the Philippines,the National Economic and Development Authority(NEDA)of the Philippines,the Department of Science and Technology of the Philippines,and the Ministry of Science and Technology of Viet Nam.The following

13、policy practitioners provided invaluable comments:Mr.Hestu Yoga Saksama,Director General of Taxes,and Director of Tax Regulations;Mrs.Juvy Danofrata,Assistant Secretary of Finance,and Head of the Fiscal Incentive Review Board(FIRB)Secretariat;and Mr.Nguyen Duc Hoang,Deputy Director General of State

14、Agency for Technology Innovation(SATI),Ministry of Science and Technology(MOST)of Viet Nam.The team is grateful to Daein Kang,(Consultant),Grace Morella(Consultant),Kristiana Torres(Assistant),and Adela Antic(Consultant)for facilitating the policy discussions with experts and government representati

15、ve from Indonesia,the Philippines,and Viet Nam.This case study was supported by the national government of the Republic of Korea through the Korea-World Bank Partnership Facility(KWPF).4A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIesContentsAcknowl

16、edgments.4Abbreviations and Acronyms.6Executive Summary.8 01.Introduction.10 02.Structuring the Analysis of RDTI Policy Practice.2003.Design Features of RDTIs.2704.Management Features of RDTIs.4505.Conclusion.56 Appendices.58A.Profile of the R&D Tax Schemes in the Philippines,Indonesia,and Viet Nam.

17、59B.Evidence of the Effectiveness of R&D Tax Incentives in Comparator DevelopingCountries.77References.81Notes.86A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes5Abbreviations and AcronymsBEPS Base Erosion and Profit ShiftingBIR Bureau of Internal R

18、evenue BOI Board of InvestmentsCIT Corporate Income Tax CORFO Production Promotion Corporation Chilean agency for promoting competitiveness CPA Certified Public Accountant CREATE Corporate Recovery and Tax Incentives for Enterprise DIAN Direccin de Impuestos y Aduanas Nacionales de Colombia National

19、 Tax and Customs Directorate of ColombiaDGT Directorate General of Taxes(of Indonesia)eFPS Electronic Filing and Payment System ETR Effective Tax Rate EU European UnionEY Ernst and YoungESCAP Economic and Social Commission for Asia and the PacificFDI Foreign Direct InvestmentFIRB Fiscal Incentives R

20、eview Board(of the Philippines)FIRMS Fiscal Incentives Registration and Monitoring System(of the Philippines)GDP Gross Domestic Product GMT Global Minimum Tax HEI Higher Education Institution IMF International Monetary FundIOT Internet of Things IPA Investment Promotion Agency iPER Innovation Policy

21、 Effectiveness Review IPR Intellectual Property Right IT Information Technology ITH Income Tax Holiday KIPF Korea Institute of Public Finance KOITA Korea Industrial Technology Association Korean Won M&E Monitoring and Evaluation6A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And less

22、ons for develoPIng CountrIesMinCiencias Ministerio de Ciencia,Tecnologa e Innovacin Ministry of Science,Technology and Innovation(of Colombia)MOEF Ministry of Economy and Finance(of the Republic of Korea)MNE Multinational EnterpriseMSE Micro and Small EnterpriseNABO National Assembly Budget Office(o

23、f the Republic of Korea)NIRC National Internal Revenue Code(of the Philippines)NOLCO Net Operating Loss Carry-OverNTS National Tax ServiceOECD Organisation for Economic Co-operation and DevelopmentPEZA Philippines Economic Zone AuthorityPhD Doctor of PhilosophyPRO Public Research OrganizationPWHT Pa

24、yroll Withholding TaxPWC PricewaterhouseCoopersR&D Research and DevelopmentRDTI Research and Development Tax IncentiveSIPP Strategic Investment Priority PlanSME Small And Medium EnterpriseSSC Social Security Contribution STEM Science,Technology,Engineering,And MathematicsSTO Scope,Targeting,And Orga

25、nization(Framework Of Analysis)TIDIS Ttulos de Devolucin de Impuestos tax refund titlesVAT Value-Added TaxA CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes7Executive Summary In both developing and developed economies,tax incentives are among the most

26、 popular policy instruments governments use to induce private investment in research and development(R&D).As a form of indirect incentives,tax incentives promote private spending in R&D by reducing the cost of capital to invest in it(Cirera et al.2020).More generally,R&D tax incentives(RDTIs)can inf

27、luence a host of development drivers:the quantity and quality of innovation,the mobility of innovation activity and of researchers across regions and countries,the dynamism of firms,the quality of firms and researchers,and the high-level direction of research efforts(for example,from basic research

28、to applied research)(Akcigit and Stantcheva 2020).In contrast to direct support measures such as cash grants,RDTIsat least in principleentail lower compliance and administrative costs for both the beneficiary firms and the implementing agencies.One downside,however,is that as a general matter,RDTIs

29、do not allow for the explicit targeting of the R&D projects that have the highest social returns,as grants can do.In addition,RDTIs can bring budgetary uncertainty when compared with direct support(Cirera et al.2020).The available empirical evidence from impact evaluation studiesmost of which have b

30、een conducted in Organisation for Economic Co-operation and Development(OECD)countriessuggests that RDTIs are effective in inducing additional private R&D investment and,to a lesser extent,R&D outputs,such as patents and commercially viable products(OECD 2019).The limited evidence that is available

31、from developing countries reinforces these findings,pointing to similarly positive effects of such incentives on private firms R&D inputs and outputs(Cirera et al.2020).Against this backdrop,the focus of this policy note is on identifying specific design features and operational practices that can a

32、ssist in the deployment of RDTIs in developing countries.The aim is to identify principles that can guide the task of adapting emerging good practices for designing R&D tax incentives to the conditions that typically prevail in developing countries.Those conditions include,for example,low rates of t

33、ax revenue collection,overstretched tax administrations,high levels of informality,unpredictability,and uncertainty;high relevancy of adaptative innovation;and high levels of perceived and actual risk exposure to tax evasion and fraud.8A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,A

34、nd lessons for develoPIng CountrIesThis note is expected to provide an operational bridge that will facilitate the transfer of OECD good practices for designing RDTI schemes into the prevailing contexts and conditions of three emerging Asian economieshenceforth,the“client countries”:Indonesia,the Ph

35、ilippines,and Viet Nam.This knowledge transfer becomes especially important as those countries use tax incentives for R&D activities by multinational enterprises that will be affected by the global minimum tax(GMT)designated by international agreement.This mission is part of the larger World Bank pr

36、oject“Innovation Policy Learning from Korea:Lessons for Their Design and Execution in Developing Countries.”To accomplish those goals,this note combines a review of the available developing-country evidence on the impacts of RDTI on private R&D inputs and outputs with the main findings of interviews

37、 that World Bank teams conducted during the first half of 2020 with international experts and with policy makers in charge of RDTI regimes in selected country-level case studies.The note also provides an overview of the Republic of Koreas experience with RDTI schemes to distill applicable and timely

38、 lessons for adapting international good practices to the realities of the three client countries.A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes901Introduction10A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoP

39、Ing CountrIesThis case is part of the series of deliverables under the World Banks“Innovation Policy Learning from Korea:Lessons for Their Design and Execution in Developing Countries”which aims to promote better innovation policy design and execution in East Asian countries through knowledge transf

40、er and capacity building,drawing upon the experience of the Republic of Korea.As a country that has seen dramatic growth in private research and development(R&D),the Republic of Korea is uniquely positioned to offer valuable lessons to developing countries that aspire to climbing the“capability esca

41、lator”(Cirera et al.2020).In the 1960s,Koreas GDP per capita was comparable to levels found in the poorer countries of Africa and Asia.Over the following decades,Korea experienced remarkable economic growth and global integration to become one of the worlds strongest industrialized economies.Through

42、out Koreas catch-up journey,one of the governments key emphases has been innovation.From the initial“imitative innovation”phase until today,Koreanow a frontrunner in many high-tech areashas effectively promoted business growth and industrial upgrading through various policy instruments.One such inst

43、rument is tax incentives to encourage firms R&D activities.Korea introduced R&D tax incentives(RDTIs)in the 1970s to promote indigenous R&D but has since refined its incentive schemes.Korean scholars widely agree that,over the past several decades,RDTI schemes have played an important role in transf

44、orming the country into an innovation-led economy with a high R&D intensity rate.In addition,Korea has been active in sharing its policy experience with developing economies through bilateral and multilateral programs such as knowledge-sharing partnerships.This proactive work has been highly benefic

45、ial to aspiring developing countries,many of whom are keen to draw on Koreas development experience in various ways.Among those countries are the three identified in this project:Indonesia,the Philippines and Viet Nam.Although they each face different development challenges,those three countries,ove

46、rall,appear ready to absorb and implement innovation lessons from Korea.All three have recently graduated from lower-middle-income status to join the ranks of middle-income countries.Going forward,continual transformation and upgrading through innovation will be needed to unlock further growth and o

47、vercome the well-known mid-income trap.To that end,Koreas experience of transforming its economy through innovation-driven growth could offer them practical,actionable lessons,especially in connection with best practices for RDTI improvement and expansion.MotivationA CAse study on KoreAs r&d tAx InC

48、entIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes11What Are R&D Tax Incentives,and Do They Relate to Innovation?RDTIs are an indirect way of supporting firms R&D activities by reducing their tax liabilities(Cirera et al.2020).According to the OECD Frascati Manual(OECD 2015),for an ac

49、tivity to be classified as R&D activity,it should meet basic criteria:Novel:new or improved business component,such as a product,process,or formula;Creative:based on new concepts or ideas that that contribute to the stock of existing knowledge,which typically is technological in nature and linked to

50、 the hard sciences(excludes social science research and art and humanities);Uncertain:due to the technological nature,carries a risk that the project will not succeed;Systematic:initiatives conducted in a planned way,with budgets and records kept of both the process followed and the outcome;Transfer

51、able:with results that can be codified and shared with other researchers,who may be able to reproduce them(that is,results cannot be tacit).Developing countries implementing RDTIs have included broader definitions of what constitutes R&D that balance productivity enhancing over science,technology,an

52、d engineering to include“new product or processes.”Examples of such activities include new product development,automation,software development,design and engineering,product improvement and quality enhancement,tooling design,equipment modification,and scaling up of tested pilot batches.Among the dif

53、ferent categories of tax incentives,most RDTIs fall into the following two:(1)those that are based on expenditures in R&D(expenditure-based)and(2)those based on the results of R&D or related innovation activities or sectors(income-based).The latter category includes either licensing or asset disposa

54、l linked to R&D.Expenditure-based RDTIs have traditionally been the dominant type of tax support for R&D,but income-based RDTIs are increasingly common,particularly among OECD member countries.Another way to distinguish RDTIs is to look at which firms R&D expenditures are eligible for a tax incentiv

55、e scheme.Volume-based RDTI schemes determine the amount of tax relief by the total volume of the firms R&D expenditures each year.Alternatively,incremental RDTI schemes allow firms to deduct only the excess amount of the firms R&D expenditures in a given year above a certain base amount,typically de

56、termined by the previous years expenditures or an average of the past few years.Hybrid RDTI schemes combine elements of the preceding two types.Governments have typically provided RDTIs to private sector firms to correct market failures(Cirera et al.2020;OECD 2016).First,incomplete appropriability l

57、eads to underinvestment in R&D(relative to a socially optimal level)because knowledge resulting from a firms R&D can spill over to other firms.Second,difficulties in finding external finance because of the high-risk nature of R&D also lead to underinvestment in R&D,especially in the case of small an

58、d medium enterprises 12A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes(SMEs)and startups that lack easy access to capital.Third,inadequate collaboration between private sector firms and research organizations often prevents more efficient use of re

59、sources and results in missed opportunities.Thus,policy makers globally use tax support to overcome such failures and foster innovation.Why the Focus on RDTIs?Tax incentives are one of the most frequently used policy instruments for inducing private investment in R&D in both developing and developed

60、 economies.RDTIs reduce the cost of capital to invest in R&D,thus creating incentives for increasing private firms spending on R&D(Cirera et al.2020).Research has shown that R&D activities are robustly correlated with innovation and that RDTIs influence innovation through several channels,including

61、the quantity and quality of innovation,the mobility of innovation and researchers across regions and countries,and the quality of firms and researchers(Akcigit and Stantcheva 2020).The evidence from developed and developing countries supports the general proposition that the quantity of R&D increase

62、s when its tax price falls.The elasticity of R&D investment to its cost has been estimated to be at unity or greater(Bloom,Van Reenen,and Williams 2019;Cirera et al.2020).In addition,the presence of RDTI has been linked to the increased probability that firms become R&D performers(Criscuolo 2009).Ho

63、wever,input additionality has been estimated to be lower for new entrants to the RDTI scheme,relative to the incumbents.This finding is consistent with evidence revealing that R&D support measures can create the unintended consequence of protecting incumbents and slowing down the rate of new entrant

64、s to the economy(Bravo-Biosca,Criscuolo,and Menon 2013).The evidence of the effects of RDTIs on output additionality remains much scarcer than for input additionality,especially in developing country settings.Overall,the results from studies suggest positive effects of firms on sales,increased proba

65、bility of developing new products,and more patent applications(Cirera et al 2020).A Norwegian study found positive effects of RDTIs on product and process innovation,but those effects were new to the firm and not new to the market,suggesting that the degree of novelty from RDTIs is lower than that f

66、rom direct support.RDTIs have several strengths compared with other innovation policy instruments.First and most crucially,RDTIs are known to be less distortionary than more a direct instrument,such as R&D grants,which require agencies to select and award participants.RDTI schemes are generally enti

67、tlement based,letting firms choose the R&D activities in which they wish to invest.Second,RDTIs are simpler and administratively less costly to implement.From the governments perspective,administering RDTIs is typically less costly because they involve less discretion than direct support instruments

68、,and their benefits can be delivered through the corporate tax system.Those benefits can hold true for small firms,which typically lack the resources for preparing applications for R&D grants and subsidies.Third,RDTIs can easily be linked to the attraction of foreign R&D efforts and R&D talent.RDTI

69、schemes can be used to incentivize multinational enterprises(MNEs)to locate their innovation activities in a foreign,developing country,bringing the potential of knowledge spillovers.Fourth,RDTIs that provide incentives to firms to attract high-skilled foreign talentfor example,income tax deductions

70、 for engineerscan help bring knowledge A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes13and new skills into a country.Some proponents of a more cautious policy-building approach argue that,given the limited capacity of the private sector in designi

71、ng R&D projects and of implementing agencies in deploying those schemes effectively,developing countries should first pay attention to policy instruments other than RDTIs.Those individuals also typically argue for the relative importance of advancing non-R&D-based innovation in emerging economies.Al

72、though those are valid points,in many emerging economies,practitioners are no longer still debating whether they should embark on using RDTIs to promote innovation.Several developing countries are,at this point,already deeply vested in using RDTIs,and the degree of using those schemes is only likely

73、 to increase in the future.Innovation policy reviews by the World Bank in recent years,for example,indicate that tax incentives for R&D can represent up to 90 percent of the budget for promoting business innovation in any given year.In addition,recent reviews in OECD member countries reveal that the

74、 use of tax incentives for R&D and non-R&D innovation has increased since the 2000s as the number of countries using R&D tax incentives has grown and as the scale of tax credits has increased(Izsk,Markianidou,and Radoevi 2013;OECD 2009).The Case for Learning from Koreas RDTI ExperienceThis case stud

75、y aims to share lessons about the design and implementation features of RDTI schemes with practitioners in developing countries,where private investment in R&D remains relatively low.The study focuses on Koreas experience with RDTI schemes for several reasons.First,Korea has stood out as a country w

76、here substantial R&D activities take place,with an R&D intensity of 4.8 percent of GDP in 2020,and a remarkable share of private R&D investment.RDTIs are believed to have played an important role in Korea in promoting private investment in R&D(Jung,Oh,and Park 2012;Noh and Lee 2014).Second,the revie

77、w of the evidence from impact evaluations suggests that RDTI schemes have brought positive results,such as inducing R&D activities among beneficiaries,particularly during the 2000s and 2010s.Firms that participated in RDTIs during the early 2000s were 5 to 10 percent more likely to have implemented

78、innovations in their product or service lines or in their processes(STEPI 2006).Furthermore,RDTIs led to a significant increase in total R&D expenditure among participant firms during the 2010s(KIPF 2018).Third,Koreas policy trajectory offers a good frame of reference for developing countries seekin

79、g to advance their RDTI systems.The Korean government introduced RDTIs in the 1970s to promote indigenous R&D.Since then,RDTI schemes have evolved,gradually transitioning toward seeking support for SMEs(KIPF 2018).Learning from the implementation challenges posed by those schemesand the adjustments

80、that had to be made to themcould give developing country practitioners insight into the challenges that they,in turn,face.To assess the effectiveness of Koreas RDTI schemes,it is important tot examine the countrys experience with RDTIs through the lens of international good practice and evidence.14A

81、 CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIesHowever,the data available in developing countries are too limited to offer a holistic view of the principles on which an RDTI system should be built.To develop a framework for analyzing implementation

82、principles and practice,the next several chapters therefore review several international examples.Koreas RDTIs are subsequently presented to help readers understand better how Korea is positioned in the global context and experience.RDTI Policy Features in Korea and Implications for Developing Count

83、riesThis chapter ends with an overview of the Korean experience in designing and adopting RDTIs to promote private investment in R&D and innovation.It provides the context for developing RDTI schemes and profiles the three major RDTIs in operations in the country.According to the OECD R&D Tax Incent

84、ives database,Koreas R&D intensitydefined as expenditure on R&D as a percentage of gross domestic product(GDP)of 4.8 percent of GDP was the second highest among OECD member countries in 2020,second only to Israel.Koreas R&D intensitymade it one of the best performers in the world.The country also le

85、d globally in R&D expenditure growth.As shown in figure 1.1,Koreas upward trend in R&D expenditure relative to GDP stands out even among advanced economies.FIGURE 1.1 R&D Intensity Among OECD Countries,19912021 Source:OECD,“Tax Incentives for R&D and Innovation,”https:/www.oecd.org/innovation/tax-in

86、centives-rd-innovation/.Source:World Bank,based on data from OECD(2020a).Note:JPN=Japan;KOR=Republic of Korea;USA=United States of America;CHN=Peoples Republic of China;ISR=Israel;OECD=Members of Organisation for Economic Co-operation and Development;EU27=all 27 Member States the European Union(excl

87、uding Northern Ireland)-1 2 3 4 5 6%162021JPNKORUSACHNISROECDEU27A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes15Since the 1960s,and through the enactment of the Regulation of Tax Relief Act,Koreas RDTI schemes have evolved s

88、ignificantly,with existing schemes covering all stages of firm innovationfrom investment in R&D to commercialization of its results(Korea National Law and Information System 2017).By 2020,Korea ranked ninth among OECD countries in the value of government support to RDTIs as a percentage of GDP(figur

89、e 1.2).FIGURE 1.2 Indirect Government Support Through R&D Tax Incentives as%of GDP,202000.050.10.150.20.250.30.35United KingdomFranceAustriaPortugalBelgiumIrelandNetherlandsCanadaRepublic of KoreaAustraliaTrkiyeOECD-TotalNorwayItalyCroatiaEU 27 JapanSloveniaBrazilNew ZealandSlovak RepublicDenmarkHun

90、garyCzech RepublicLithuaniaSwedenGreecePolandColombia Source:World Bank,based on data from OECD(2020a).Note:EU=European Union;GDP=gross domestic product;OECD=Organisation for Economic Co-operation and Development;R&D=research and development.Koreas RDTIs are entitlement based,with many schemes takin

91、g a“negative list”(for sectors and activities)approach.That is,instead of positively enumerating the specific sectors,regions,activities,or technologies that are eligible for RDTIs,the law lets any firms that meet certain prescribed criteria potentially benefit from the incentives except those that

92、have been excluded in the negative list.Such an approach is believed to reduce the risks of allocative distortions.Three Important RDTIs in KoreaIn Korea,most RDTIs rely on tax credits.Two of the largest RDTI schemes,as measured by the size of their tax expenditures in 2017(NABO 2018),rely on tax cr

93、edits to promote R&D activities.The use of tax credits over tax deductions is in line with the practice of OECD member countries.Three of the most prominent RDTI schemes of Korea are detailed below.Tax Credits for Research and Human Resources Development Expenses Until 2018,this RDTI scheme provided

94、 tax credits of up to 25 percent of all eligible expenditures to firms that incur expenses for research and human resources development in a taxable year.The 16A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIesscheme was the largest of all RDTI scheme

95、s in Korea:in 2017,the tax expenditure associated with it was 2.5 trillion(approximately US$1.8 billion),a larger amount than the tax expenditures of all the other RDTI schemes in Korea combined(NABO 2018).Most domestic firms with eligible expenses can apply for the tax credit,but the tax credit rat

96、e differs depending on the size of the firm and the choice of calculation method,as shown in table 1.1.Firms can choose either the volume-based or the incremental-based calculation method,but certain conditions apply to the choice of the incremental-based method;the firm must have incurred expenses

97、for research and human resources development in each of the past four years,and the expenses for the current fiscal year should be bigger than those of the average of the past four years.TABLE 1.1 Calculation of Tax Credits for Research and Human Resources Development Expenses MethodSMEsMiddle-Marke

98、t EnterprisesLarge EnterprisesVolume-based25%of R&D expenditures 815%of R&D expenditures 02%of R&D expendituresIncremental-based50%of(R&D expenditures-last years R&D expenditures)40%of(R&D expenditures-last years R&D expenditures)25%of(R&D expenditures-last years R&D expenditures)Source:World Bank s

99、taff,based on KOITA(2020)and on information valid as of December 2020.Eligible research and human resources development activities,such as training,are prescribed in the law.In a nutshell,in the case of in-house R&D,a firm is expected to have its own research center or a department specializing in r

100、esearch.Expenses for outsourced R&D are also generally eligible,but eligible outsourcing partners are specified in the law.Enterprises and SMEs can carry forward unused benefits for 10 years.SMEs are also partially exempt from alternative minimum tax.Firms with eligible expenses can apply to the loc

101、al tax office by submitting supporting documents and completing forms available online.Tax Credits for Investment in Facilities for Research and Human Resources DevelopmentThis tax credit scheme rewards firms that invest in facilities for research and human resources development by providing a tax c

102、redit of up to 7 percent of the investment amount.In 2017,a tax expenditure of 153 billion(approximately US$140 million)was incurred for this RDTI scheme(NABO 2018).As with other major RDTIs in Korea,this scheme also favors smaller enterprises by offering higher tax credit rates:In 2018,a rate of 7

103、percent applied to SMEs,3 percent to middle-market enterprises,and 1 percent to large enterprises.Broad categories of eligible facilities include research facilities,job training centers,and facilities used to commercialize new technologies.More detailed lists of eligible investments are provided in

104、 the law.Firms can carry forward unused benefits for five years.A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes17Firms with eligible investments can apply to the local tax office through a form available online.By January 2021,the“Tax Credits for I

105、nvestment in Facilities for Research and Human Resources Development”was integrated into the“Comprehensive Investment Tax Credit,”combining the“Facility related Investment Tax Credit”and“Small and Medium-sized Enterprise Investment Tax Credit”into one scheme.Those tax credits were combined to extend

106、 tax benefits for almost all tangible assets(excluding land,buildings,and automobiles)to allow enterprises to have more choices for investment decisions.The tax credit rate on“tangible”investments for research and human resource development was 1 percent for large enterprises,3 percent for medium-si

107、ze enterprises,and 7 percent for SMEs.Income Tax Reductions for Foreign Engineers and Special Taxation for Foreign WorkersCertain foreign engineers prescribed in the law shall be granted a tax reduction equivalent to 50 percent of the income tax on the earned income from a domestic employer for five

108、 years.The RDTI scheme promotes the acquisition of advanced foreign know-how by domestic firms.The total tax expenditure from this RDTI scheme in 2017 was 136 billion(approximately US$98 million)(NABO 2018).More specifically on eligibility,a foreign engineer as prescribed in the law refers to a non-

109、Korean national who falls under one of the following categories:A person who provides technology in Korea under an engineering technology license agreement prescribed under the Ordinance of the Ministry of Economy and Finance(MOEF).A researcher working in the R&D facility of a foreign capital-invest

110、ed company that meets the requirements prescribed under the Ordinance of the MOEF.In 2022,the law was amended to encourage additional inflow of talented foreign scientists into Korea.The amendment expanded the scope of benefits for employment agencies by allowing workers who do not work at research

111、and development facilities of foreign-invested companies to benefit from its clause.For example,the new clauses extended benefits to employment of persons who hold a bachelors degree or higher in the fields of natural science,engineering,and medicine and who have at least five years of R&D and techn

112、ology development experience at universities and research institutes abroad(for PhD holders,the requirement is two years of such experience before obtaining a doctoral degree)as prescribed by the Ordinance of the MOEF.Adjustments Made to R&D Tax Incentive Schemes in Korea and Implications for Develo

113、ping CountriesSince the mid-1980s,Korean policy makers have relied on tax incentives to induce firms to invest in R&D,promote technological catch-up,and shift production to higher-end goods.The magnitude of tax expenditures grew significantly,and the Korean government had to increase its monitoring

114、and evaluation(M&E)of RDTI schemes.Starting in 1982,adjustments were introduced to shift the focus from foreign to domestic R&D investors.Monitoring and impact evaluations enabled policy makers to track performance of the scheme throughout implementation and to adjust more frequently,fostering progr

115、ammatic 18A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIeslearning and adaptation of policy design.Additional measures contributed to implementation,especially through the M&E of tax incentives programs,requiring that large beneficiaries carry out e

116、x ante feasibility studies and ex post effectiveness reviews for all participants.For schemes targeting smaller firms,program self-assessments were encouraged,along with evaluations to assess impact additionalitythe extent to which the program induces additional impact that would not,in the programs

117、 absence,otherwise have occurredthat were commissioned from third-party research institutes.With a high level of concentration of benefits among a small group of large firms(de facto),Korean policy makers started to adjust the schemes for greater inclusion in the 2000s(Ha 2012).Deliberate measures w

118、ere therefore introduced not only to eliminate restrictions and relax conditions of eligibility to encourage more firms to apply(extensive margin)but also to increase the intensity of R&D spending(intensive margin).The expanded participation of domestic firms coincided with reforms that reduced the

119、costs of compliance and assisted prospective participants to apply,especially SMEs and startups.Those measures are believed by policy makers to have made the countrys RDTIs more inclusive and broad-based.RDTI schemes in Korea are believed to have contributed to the growth of the technological and re

120、search capabilities of domestic firms(Noh and Lee 2014).The measures targeting intensity of support have contributed to the increase of R&D as a percentage of GDP.At the time of writing,Korea was among the OECD countries that provide the largest level of government support to business R&D.It is wort

121、h noting thatalong with tax incentivesother policy measures implemented in parallel to RDTIs,such as funding to public research organizations and matching grants for R&D,have also contributed to the technological catch-up of firms and the growth of their R&D capabilities.To make the case easier to r

122、ead,the authors have organized the chapters in sequence.Chapter 2 introduces the analytical framework used to document the case study.The design features are the subject of chapter 3,including targeting;and administrative features of RDTIs are examined in chapter 4.In each chapter,the structure star

123、ts with a synthesis of the international experience but is customized to the developing country context.Next is a brief profile of RDTI features in the three client countries and their degree of convergence with(or divergence from)international practice.Each chapter ends with a description of the Ko

124、rean experience of policy practice for designing and implementing RDTIs and a comparative analysis between the Korean,international,and client country policy practice.Each section ends with a discussion of policy implications for developing countries.Chapter 5,the final chapter,provides a brief conc

125、lusion,comparing the RDTI schemes in Korea to international practice under the proposed framework and teases out some implications for developing countries.A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes1902Structuring the Analysis of RDTI Policy P

126、ractice20A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIesThe goal of this chapter is to introduce an analytical framework to assess policy practice in the design and implementation of RDTIs,with a focus on their use in developing countries.In the fo

127、llowing chapters,the emphasis on identifying good policy practiceswhich developing countries could replicatereflects on two constraints.First,the evidence of effective results from using RDTIs in developing countries remains limited and,comparatively,much scanter when compared with that for OECD cou

128、ntries.Second,practitioners in developing countries typically have less access to knowledge resources and less experience to make informed choices on how to effectively design and implement RDTI schemes.Identifying good policy practice does not imply introducing a one-size-fits-all approach to desig

129、ning and reforming RDTI schemes.Policy makers ought to adapt good practices to the specific conditions found in each country,considering the capacity of implementing agencies,the strength of the competencies of the intended beneficiaries,and the local conditions of research skills,finance,regulatory

130、 framework,and infrastructure,among others(Cirera and Maloney 2017).Distilling principles of good policy practice could serve to guide policy makers engaged in either designing or adjusting RDTI schemes to address specific challenges in advancing RDTI policies.For example,some practitioners may find

131、 that their most urgent need is to increase the cost-effectiveness of RDTI policies.Sometimes,the most pressing issue might be to expand the proportional participation of small or young firms in the RDTI programas a matter of equity.For others,the aspiration of the scheme might induce“behavioral add

132、itionality”the degree to which the scheme induces additional R&D-related behaviors that would not,in the schemes absence,otherwise have occurredby promoting collaboration among firms or between firms and research centers.Whatever the case,the choice of the schemes features should be consistent with

133、its policy objectives.Furthermore,the design of the scheme should also consider what levers are likely to drive incremental investment in R&D and positive externalities.RDTI schemes can generate economic benefits in the form of additionality and knowledge spilloversknowledge created by one firm that

134、 becomes available to other firms in ways that benefit them and create economic or social value.Important questions continue to challenge practitionersfor example,should the design of the scheme prioritize changing the composition of firms and reducing the barriers for new entrants(that is,increase

135、the extensive margin),or should it prioritize incentivizing firms that have already invested in R&D to increase the level and frequency of their R&D investments(intensive margin).The lack of previous research and the resulting information gaps,however,hamper evidence-based policy making,particularly

136、 in developing countries.This chapter proposes a framework to assess the practice of RDTI and describes the overall approach to documenting international policy experience,with a focus on Korea.A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes21Chall

137、enges Associated with RDTIs,Especially in Developing CountriesChallenges are associated with RDTIs as a type of innovation policy instrument per se,and challenges specifically related to deploying RDTIs exist in developing countries.Three challenges associated with RDTIs per se Capture by large incu

138、mbents:In many countries,the main beneficiaries of RDTIs tend to be large R&D spenders,despite efforts to reward SMEs with higher credit or deduction rates.Once the tax benefits given to large firms have persisted for many years,removing,or adjusting them often becomes challenging,in part because of

139、 regulatory capture.Worth noting is that the recent global minimum tax(GMT)agreement introduces rules to prevent MNEs from receiving direct compensation for tax incentives lost because of the imposition of top-up taxes.Difficulty in ascertaining eligibility:In many cases,firms apply for R&D tax bene

140、fits by submitting self-prepared applications with supporting documents.From the governments perspective,assessing compliance can be costly and time-consuming because of the special skills required for eligibility verification and management of fraud risks,especially in countries without strong admi

141、nistrative systems.From a firms perspective,uncertainty around eligibility poses a financial risk if a firm must commit itself to an expensive R&D project before knowing with certainty whether its R&D expenditures will be eligible for tax benefits.The situation can be particularly difficult when pro

142、spective beneficiaries face overlapping compliance regimesfor example,with eligibility being tested simultaneously by the investment promotion agency(IPA)and the tax administration.Difficulty in choosing the right design features:The core issues policy makers face include(1)how to increase input add

143、itionalitythe extent to which the RDTI scheme induces additional R&D that would not,in the schemes absence,otherwise have occurred;(2)how to increase knowledge spilloversknowledge created by one firm that becomes available to other firms in ways that benefit them and create economic or social value;

144、and(3)whether to prioritize policy strategies that would either increase the participation of additional firms(that is,rely on expanding the extensive margin)or promote investment in R&D per firm(that is,rely on expanding the intensive margin of R&D).In considering those questions,policy makers face

145、 pressure over the efficient use of fiscal resources because,from the governments point of view,tax revenues forgone due to RDTI schemes are equivalent to tax“expenditures.”Three challenges specific to deploying RDTIs in developing countries Lack of financial resources,especially in the current cont

146、ext of fiscal stress:In developing countries,RDTI schemes often are administered in an environment of pressured competition over limited resources,which means that even if they are sufficiently earmarked for revenue forgone in the short term,their longer-term sustainability is highly uncertain.Devel

147、oping 22A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIescountries may face greater political stress to justify forgone tax revenues,given that their governments often face pressing social needs,such as poverty alleviation.In the wake of the COVID-19

148、 global pandemic and several international crises,diminished tax revenue and increased social spending have left many governmentsespecially developing country governmentswith severely constricted fiscal space.Lack of evidence to guide informed policy making:Despite the urgent need for relevant knowl

149、edge in developing countries,most empirical evidence from impact evaluation studies comes from developed countries,such as OECD member countries.Policy practitioners in developing countries therefore have limited guidance to replicate international best practices within their own peculiar national s

150、etting and face heightened uncertainty surrounding expected outcomes.Compounding that scenario,such policy practitioners often lack a good functional grasp of the strengths and potential risks of specific design features of RDTIs.Lack of enabling framework conditions to underpin RDTIs additionality:

151、RDTIs in developing countries often are not as effective as they looked on paper because of the absence of other factors that contribute positively to R&D and innovation,notably the availability of R&D personnel,skills,and a well-functioning intellectual property rights(IPR)protection regime(UN ESCA

152、P 2017).The availability of R&D personnel and a well-functioning IPR regime are two primary concerns that MNE decision makers consider when they are contemplating the possibility of undertaking R&D in a developing country.More generally,the relative importance of tax incentives in investment decisio

153、ns among international firms has consistently ranked lower than other important considerations,such as economic and political stability;the presence of local factor markets,such as local content and skills;and the strength of the local legal framework(IMF,OECD,UN,and World Bank 2015).Documenting Pol

154、icy Experience to Bridge Knowledge GapsThis case study aims to contribute to the body of practitioner publications by focusing on the following:Operational issues of RDTIs that developing country practitioners face.This document is not meant to synthesize the evidence of impact and results from the

155、implementation of RDTIs,which has been reviewed extensively.Overall,what is known about RDTI effectiveness is relatively well established and documented(Cirera et al.2020;Khler,Laredo,and Rammer 2012).Instead,the present case study focuses on a largely qualitative assessment of the available evidenc

156、e,with the aim of distilling applicable principles for designing and adopting RDTI schemes in developing countries.The need to bridge gaps in policy expertise.A previous review of innovation policies was conducted by the World Bank in three“client countries”Indonesia,the Philippines,and Viet Nambetw

157、een 2018 and 2020.That focus helped the team narrow the scope of data collection for the case study.The baseline of practice in those three countries A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes23also allowed the authors to anchor the analysis o

158、f the Korean case and the international experience.Although the initial profiling of the RDTI practice was not meant to substitute for a diagnostics exercise to determine specific problems of practice in those countries,it nevertheless allowed the authors to compare the different design features and

159、 identify gaps in practice with international experience.The team relied on synthesizing existing reviews,reports,and specialized publications(for example,policy evaluations when available)and direct discussions with practitioners in each of those countries.The Korean RDTI policy and practice.The do

160、cumentation of the Korean experience included profiling existing features of RDTI schemes and engaging with Korean practitioners and policy researchers to understand the successes and failures in implementation and the adjustments and changes made.The goal also was to assess the degree of adherence

161、of Korean practice to that of developed countries to identify areas of strength in(or departure from)the policy design and implementation.Ultimately,those comparisons allowed the authors to identify areas of focus for documenting the Korean experience.Adaption to developing country conditions.The ca

162、se team looked at the international literature to create a compendium of principles of RDTI policy practice but with a focus on adapting them to developing countries.Given that the available data were primarily centered on OECD and EU member countries,however,the team conducted additional reviews of

163、 the evidence from prior studies on the impact of RDTIs for six developing countries:Argentina,Chile,China,Colombia,Malaysia,and Mexico.Those countries were selected on the basis of the presence of impact evaluations and detailed implementation assessments,complemented by semi-structured interviews

164、with policy makers responsible for managing RDTI schemes in those economies.The team supplemented that review with interviews with international tax experts and practitioners.The interviews were designed to understand the composition of RDTI schemes and distill the lessons learned on how practitione

165、rs have addressed operational challenges in designing and implementing RDTIs in their countries.The next step to comparing and analyzing countries RDTI schemes is to establish a framework to analyze and define the various features of RDTI schemes;that is the subject of the next section.The Features

166、for Effective Design and Implementation of RDTIsA framework can be useful for breaking down the composition of an RDTI scheme into its separate parts,allowing identification of an array of alternative(and complementary)design and implementation features that could be explored and evaluated.A framewo

167、rk can also help practitioners to structure a discussion about the ideal combination of those features on the basis of practice in a variety of settings.24A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIesThe proposed framework to analyze RDTIs consid

168、ers two dimensions:design features of RDTIs and management features features of RDTIs.As mentioned previously,one source of motivation for this case study was the set of previous evaluations of the quality of design,implementation,and governance of the innovation policy mix.The proposed framework ai

169、ms to complement that analysis and serve as a reference for systematically capturing various aspects of RDTIs that span the policy life cycle and can be applied to different country contexts,both developed and developing.Each of those dimensions is discussed in the next two chapters.Worth noting,the

170、 authors sought to understand the different design and implementation features of RDTIs,which are generally accepted principles of policy practice for RDTIs,and how they can be adapted to the realities of developing countries.Several publications in the OECD introduced similar frameworks(European Co

171、mmission 2014)and have attempted to synthesize good policy for RDTI implementation.The expanded presentation of those features is shown in table 2.1.Table 2.1 Features for Effective Design and Implementation of RDTIsDimensionFeatures Design FeaturesAligning design with expected results of tax incent

172、ivesExpenditure eligibilityVolume versus incremental designIncome versus cost-based incentivesGenerosityTargetingFDI,multinational enterprises engaged in R&D,and the globalminimum taxIncreased participation of young and small firmsNegative tax(cash refunds)and carry-over provisionsCollaborative R&D

173、Management FeaturesEvaluation and monitoringApplication and promotionPrequalification of eligible expensesCompliance verification and reimbursementPredictability of benefits Source:World Bank,based on Correa(2013),and European Commission(2014).Note:FDI=foreign direct investment;R&D=research and deve

174、lopment.A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes25The Design Features dimension describes which tax incentive types can be used(for example,allowances,credits,reduced or preferable rates,accelerated depreciation of R&D assets,and so on),the

175、eligibility criteria(for example,eligible expenses and novelty),volume or marginal spending assignment mechanisms,generosity,and the mix of tax incentives and grant-or cash-based instruments.This dimension also distinguishes whether an RDTI scheme should be based on a firms profits or costs to induc

176、e private R&D inputs and outputs more effectively.The design dimension also addresses the question of whether RDTI schemes should provide preferential provisions to certain groups of firms based on their size,age,ownership,legal form,sector,or geographical region.The Administrative and Managerial di

177、mension distinguishes operational features related to predictability of tax incentives and the availability of organizational and supporting services for RDTI programs(for example,application and approval times,public consultation and evaluation provisions,targeted promotion,and synergies with other

178、 incentives to induce R&D investment,such as grants).26A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes03Design Features of RDTIsA CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes27Aligning Design wit

179、h Expected Results of Tax Incentives Developing countries can grant tax incentives in several ways.The basis for granting tax relief is critical because it will likely determine the cost-effectiveness of the scheme.Distinguishing the type of taxes to which incentives can be applied is important.Alth

180、ough RDTIs can bear upon payroll taxes(such as in the form of social contributions),capital gains,proceeds from sales of stock options,value-added taxes(VAT),land,and property,the majority of the reviewed RDTIs apply to corporate income taxes(CITs)(Khler,Rammer,and Laredo 2012).Tax incentives can be

181、 either profit-based or cost based(Andersen et al.2017;IMF,OECD,UN,and World Bank 2015).Choosing the right design will better align the incentives with the expected results.Profit-based incentives,such as preferential tax rates and tax holidays,are typically awarded to firms based on location,as wit

182、h special economic zones,or the type of company(that is,a presumed innovative company or a science and technology enterprise).Profit-based incentives reduce the tax rate applicable to the firms taxable income.The designated authority grants this status based on an upfront assessment of the investor.

183、The status of the company is conferred through either a label or a certification,which is typically subject to renewal within a designated period(yearly or every few years).On a tax holiday,the investor may have no obligation to file a tax return,complicating any future process of expense verificati

184、on.By 2017,income tax holidays(ITHs)and preferential tax rates were widely used in developing countries,despite the shortcomings of such incentives(Andersen et al.2017).These incentives have limitations.For example,they usually favor firms with high profits that may not need government assistance.Wh

185、en these incentives are linked to location-specific factors(such as the presence of natural resources),the evidence suggests that it leads to redundancy.In addition,tax holidays can expose countries to tax avoidance through profit shifting because companies can artificially reallocate their profits

186、to entities enjoying tax holidays through internal transfer pricing.Profit-based incentives have been associated with short-term“mobile”investments rather than long-term investments with high upfront costs.By contrast,cost-based incentivesincluding tax creditsand allowances condition the eligibility

187、 for the tax benefits based on proof of the applicants specific expenditures in R&D activities.Cost-based incentives are much more closely linked to the desired policy goal because tax relief is proportional to the level of expenditure in R&D activities,irrespective of a companys profit level.Within

188、 the category of cost-based incentives,tax allowances and tax credits grant investors the right to deduct investment costs from their taxable income(effectively reducing the 28A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIescost of capital for R&D i

189、nvestments).The advantage of tax credits is that they are not subject to change with variation in the corporate tax rate,whereas enhanced allowances must follow those variations to adjust for the change.Tax credits are widely used in developed countries,which is consistent with the OECD position on

190、their advantages.Based on the definitions from Cirera et al.(2020)and Andersen et al.(2017),the authors propose to classify the RDTI as shown in figure 3.1.FIGURE 3.1 R&D Base for DesignRDTI Base for DesignExpenditure based/Cost based/Performance based:Calculated on the basis of R&D activity expense

191、sSuch as corporate income tax benefits(tax credits and tax allowance),social security withholding tax incentives,reductions in tariffs for imported research equipment,and reimbursements of value-added taxR&D specific income based:Calculated on the basis of R&D activity that generates incomeSuch as p

192、atent boxes(profits generated from patents,licensing,and asset liquidation linked to R&D)Profit based:Calculated on corporate level,give incentives to whole firms,not R&D activity in particularSuch as tax holidays and preferential rates,typically awarded to firms on the basis of location.Sources:And

193、ersen et al.2017;Cirera et al.2020.Note:R&D=research and development;RDTI=research and development tax incentive.In the developing countries reviewed for this case study,profit-based tax incentives for R&D are typically offered based on a companys status as a“technological company”(that is,a science

194、 and technology company)or a“pioneer company.”Those designations must be verified(and recertified)over a limited period.By contrast,Korea actively prefers tax credits to tax holidays and allowances,in line with international practice.The authors of this case study found that ITHs,despite their short

195、comings,remain widely used in all three client countries.The major RDTI schemes in Viet Nam feature tax holidays.Furthermore,the past years increase in the allocation of financial resources for science,technology,and innovation programs was driven primarily by an expansion of tax exemptions in the f

196、orm of tax holidays.Reliance on tax holidays was also a fixture in the Philippines RDTIs.According to EY(2020),of the incentives available in the country before the CREATE law took full effect,the income tax holiday scheme delivered the most benefits to investors.Finally,the innovation PER report ob

197、served that Indonesia relied on tax holidays,but tax holiday incentives and RDTIs are separate schemes that channel incentives through different components.The Indonesian government relies on a specific tax holiday eligibility criteria,providing up to 100 percent of corporate income tax(CIT)exemptio

198、n for 5 to 20 years from the start of commercial production for an expanded set of pioneer sectors,such as manufacturing(PwC 2021).Tax system analysis reports indicate that tax holiday schemes often are preferred by R&D investors,suggesting a high degree of dependence and hinting at a plausible expl

199、anation as to why tax holidays remain widely in use and represent a significant portion of forgone tax revenue related to RDTIs.A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes29Tax credits are not widely used in developing countries;their use shoul

200、d be expanded when the right conditions are in place.Broad-based tax relief is generally expensive in terms of forgone tax revenue relative to the targeted tax relief.Thus,policy makers may prefer a targeted approach.Examples of targeted schemes include accelerated depreciation and investment tax cr

201、edits for purchases of equipment or hired skills used in R&D projects.Making those tax credits available independent of the profits that a company generates could expand the participation of younger and smaller firms.Worth noting,the advent of the GMT agreement will likely diminish the appeal of ITH

202、s and preferential tax rates for large multinational enterprises(MNEs).Because tax incentives targeted at attracting MNEs that conduct R&D-based innovation in host countries have been prevalent in the region,of this case discusses the GMT in further detail.Expenditure EligibilityThe design of RDTIs

203、determines the categories of specific R&D expenditures and activities.The Frascati Manual provides a standard for R&D data collection in advanced economies and provides a practical approach to classify R&D activity for the definition of eligible expenses(OECD 2015).It defines R&D activities as those

204、 that are systematic,investigative,or experimental;are in a field of science or technology;involve one or more of the categories of R&Dbasic research,applied research,or experimental development;seek to achieve scientific or technological advancement;and involve the resolution of scientific or techn

205、ological uncertainty.Qualified expenses usually include wages,raw materials,recurrent expenses,and contract research.Wages are the salaries of people involved directly in either conducting or supervising R&D activities.For example,the staff from a firms quality control or R&D department would be cov

206、ered under this definition.Generally,R&D tax claims specify the qualified staff and the time they spend on these activities.In addition,RDTI eligibility rules would qualify net wages exclusively;indirect contributions to pensions and savings typically do not qualify.The R&D supplies and recurrent ex

207、penses are raw materials used for experimentation,prototype,or testing.Depreciable property and general expenses,such as utility services,tend to be excluded from this category.Contract research implies that a third party,such as an independent contractor,does the R&D for the firm claiming the tax b

208、enefit.An example would be an independent laboratory that conducts testing as part of the R&D process.Certification services and testing for commercial production are also included in this category.To represent an eligible expense,the beneficiary not only assumes the financial risk of the project bu

209、t also ownership of the results from the investment(as intellectual property IP owner).Generally,those definitions in developed and developing countries converge,which points to the importance of a careful determination of eligible expenditures according to international practice(for example,the Fra

210、scati Manual)and the importance of strengthening the auditing capabilities for tax administration.For instance,expenditures related to wages paid to researchers are known to be associated with stronger knowledge spillovers because former employees are an important 30A CAse study on KoreAs r&d tAx In

211、CentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIeschannel through which knowledge diffuses unintentionally to other firms.In addition,tax incentives for R&D wages tend to have lower administration and compliance costs than for capital expenditures(Cirera et al.2020).By contrast,capit

212、al-intensive R&D activities may be difficult to replicate if financial barriers are at play.The OECD seems to have a general preference for including labor costs and current expenditures because capital investments in R&D may rely on assets that are subsequently disposed of(OECD 2016).However,some s

213、cholars have argued that the design of the scheme may create distortions by favoring one expense over another and that the firm is in a better position to make its own factor allocation decisions.The Colombian and Chilean schemes that were reviewed offer special provisions to afford complementaritie

214、s between RDTIs and scholarships in science,technology,engineering,and mathematics(STEM)disciplines.In the case of Chile,the RDTIs offered incremental benefits of a 1.5 times(150 percent)“super deduction”for the presence of advanced R&D wagesfor example,the wages of PhD-level researchers from STEM f

215、ields in the submitted projects.Viet Nam RDTIs give special attention to CIT reductions but also allow incentives on VAT,import duty,land use tax,and stamp duty.Even though the PER report found that the presence of researchers was a condition for obtaining high-tech status on the schemes,the assessm

216、ent was done ex ante and was not based on past expenditures on wages paid to researchers.Worth mentioning,Viet Nam has introduced tax incentive programs to attract high-tech companies operating in science parks.However,those tax incentives do not focus on spurring R&D activity per se but on attracti

217、ng investment in advanced manufacturing with the potential to generate knowledge and innovation spillovers.In 2020,Viet Nam introduced the Law on Investment(Law No.61/2020/QH14),which expanded the scope of CIT reduction to include technology transfer projects,technology incubators,science and techno

218、logy business incubators,innovative start-ups,innovation and creation centers,and R&D centers(Deloitte 2020).Article 15.1.d of this law also introduced provisions for accelerated depreciation and for increased deductible expenses.Several policy practitioners define novelty as one of the key desired

219、characteristics of R&D investment to reward through the incentive scheme.The more the emphasis is on innovation and advancement beyond the current state of technology or knowledge,the more the reward embedded in the design of the scheme.A few countries include novelty requirements as conditions for

220、eligibility(box 3.1).In the Philippines,RDTI schemes offer tax incentives for activities identified as Tier III in the Strategic Investment Priority Plan(SIPP),containing the governments list of priority R&D projects resulting in indicative outcomes such as value added,higher productivity,formation

221、of intellectual property,patents,industrial designs,copyrights,and utility models.The application for registration of Tier III activities must have the endorsement of a competent agency and first qualify for registration under Tier I.The SIPP 2022 included activities such as robotics,artificial inte

222、lligence(AI),additive manufacturing,data analytics,digital transformative technologies,and nanotechnology(under the label of Industry 4.0 technologies).Worth noting,the criteria did not include references to R&D activity classification criteria used as international practice described in the Frascat

223、i Manual(OECD 2015).A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes31Box 3.1 Novelty RequirementsIn Australia,a panel reviewing the RDTI scheme in 2019 considered tightening the definition of expense eligibility of R&D to increase the role of knowl

224、edge spillovers.However,despite the potential benefit,the decision was to hold off on the amendment to avoid changing the definition of innovation because the program was not yet fully mature.An OECD review argues that,in general,the focus of the eligibility conditions in RDTIs should be new-to-the-

225、world kinds of novelty but that in developing countries,the incentive scheme could be used to stimulate the adoption of existing technologies.The push for novel inventions and radical innovation is known to deter participation of prospective innovators.Participants in these schemes believe that gove

226、rnmental authorities can apply an excessively narrow interpretation of what constitutes R&D when evaluating applications for R&D tax incentives.The applications can be regarded as overly stringent,with a verification process that demands proof that the project in question is“scientific”and“inventive

227、.”A broader definition of innovation,one that sees upgrading and absorption of existing technology,may be more appropriate in this context.The Philippines R&D expense deduction scheme offers an additional enhanced deduction from gross income of 100 percent of total R&D expenses,granted for R&D direc

228、tly related to the registered project or activity eligible for fiscal incentives to either expenses incurred for the salaries of Filipino employees or to payments to local R&D organizations.The income tax holiday scheme may be claimed only on income derived from the activities registered with invest

229、ment promotion agencies,such as the Philippines Economic Zones Authority(PEZA)or the Board of Investments(BOI).The exemption from donors tax,as the schemes name implies,intends to promote an increase in charitable contributions by private entities to educational institutions but has nothing to do wi

230、th R&D wage support.The Indonesian RDTI schemes reviewed allow taxpayers to include R&D wages in reductions to gross taxable income.The ITH scheme focuses on CIT reductions and exemptions,and the tax allowance scheme provides various tax concessions,such as accelerated depreciation and/or amortizati

231、on deduction,extension of tax losses carryforward,and net income deduction.The super deduction scheme reduces gross revenue by up to 300 percent of the total expenses incurred for certain R&D activities,without an explicit emphasis on wage support.In Korea,RDTI schemes focused on supporting the wage

232、s of R&D personnel,especially those of SMEs.In addition,of the 10 major RDTIs,4 are exclusively focused on wage support.The analysis of eligible expenditures of RDTIs schemes in the Philippines and Viet Nam shows that those countries do not prioritize support for wages over other expenditures as eli

233、gible expenses.The authors believe that R&D wages should be explicitly considered in developing countries as a subject of focus for defining expenditure eligibility in RDTI schemes.32A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIesVolume versus Incr

234、emental Design RDTIs can apply either to all eligible R&D expenditures(volume based),to the number of R&D expenditures that exceed a given base level(incremental),or to a mixture of the two(hybrid).In theory,incremental schemes are effective in avoiding the replacement of R&D investment that would h

235、ave been incurred anyway because they reward exclusively incremental spending on R&D.However,the compliance costs of incremental schemes are generally higher than those of volume-based schemes,given that incremental schemes require review of historical financial data and project documentation to est

236、ablish and verify a base of previous R&D expenditures.On the other hand,despite their simplicity,volume-based RDTIs can be less efficient in that they are more likely to subsidize R&D expenditures that would have occurred anyway(Cirera et al.2020).A hybrid system can help offset each types shortcomi

237、ngs by combining elements of both types of schemes.Such a hybrid system can increase cost-effectiveness for policy makers(OECD 2016).Indonesia,the Philippines,and Viet Nam use volume-based incentives.The authors review of the evidence suggests that volume-based schemes are generally preferredparticu

238、larly in developing countries,where administrative simplicity may be a critical requirement.Some regional practitioners deliberately use RDTIs in combination with investment facilitation policy,typically on the assumption that the host country will become a world-class innovator and will benefit fro

239、m FDI inflows linked to foreign technologyits desirable“knowledge spillover”effects.However,the reliance on RDTIs to attract R&D-intensive FDI can have limited effects and promote“race to the bottom”competition for the lowest tax jurisdiction.Korea is one of the few OECD countries that have a hybrid

240、 system(OECD 2016).Firms can choose the option that benefits them the most of the two methods of calculating the amount of tax relief.For example,an SME applying for tax credits for research and human resources development expenses can choose between 25 percent of total R&D expenses or 50 percent of

241、 the incremental expenses from the previous year.By allowing corporate taxpayers to choose the method that best suits their firm,Korea has aimed to boost the take-up rate of its RDTIs,particularly among small and younger firms.The empirical evidence from OECD member countries,such as France and the

242、United States,supports the proposition that incremental schemes generate higher input additionality per unit of forgone tax revenue than volume-based schemes(Khler,Laredo,and Rammer 2012).However,developing country practitioners should consider the benefits of continuing the use of volume-based ince

243、ntives,given their simplicity.These schemes present lower administrative costs and demand less capacity of implementing agencies,which tend to be stretched in developing countries.In addition,at low levels of R&D,the cost-effectiveness of both type of schemes has been shown to be in the same range.F

244、urthermore,despite elevated welfare losses,volume-based schemes have been demonstrated to generate higher additionality for SMEs than for large firms.For example,Lokshin and Mohnen found in the 2012 study of Dutch RDTIs that the elasticity of expenditure to forgone tax revenue was 3.24 for SMEs vers

245、us 0.78 for large firms.A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes33Most countries that were reviewed as part of the international experience for this case study continue to use volume-based schemes to keep the scheme design as simple as possi

246、ble.However,some of the practitioners in those countries are aware of the challenges of building higher additionality relying on volume-based schemes.They should evaluate when sufficient institutional and administrative competency will allow for the effective deployment of incremental RDTI schemes.B

247、ox 3.2 Open-Ended Entailments to Facilitate R&D Investment:The Case of CORFO in ChileAt the time of the interviews in 2020,Production Promotion Corporation,the Chilean agency for promoting competitiveness(CORFO),was planning to introduce open-ended entitlements incentives for a specific segment of f

248、irms,one that would not require annual spending authorization.This modality would help firms reduce their compliance costs for application and their administrative costs.This selective group of firms would have attained portfolio-level certification and have graduated from the initial R&D project-ba

249、sed system.Prospective participants of this modality would include enterprises with a substantial record of delivering R&D projects that hold large R&D portfolios(that is,multiple projects).To qualify,firms would have to demonstrate several commitments:dedicated staff for R&D projects,an annual R&D

250、budget as part of their business plan,the appointment of governance and technical boards with the ability to identify and prepare R&D initiatives,a system for monitoring and managing the projects,and at least six projects in their current portfolio.Income versus Cost-Based IncentivesRDTIs can be cat

251、egorized based on whether tax benefits are provided in relation to cost or income(Cirera et al.2020).Cost-based RDTIs refer to tax incentives given based on expenditures in R&D,whereas income-based RDTIs are those applied to income that is generated from R&D activities and intellectual property.Tax

252、incentives on income apply to later stages in the innovation cycle,once the intangible assetssuch as patents,copyrights,trademarks,or goodwillhave been developed and can be licensed for another firm to use as an input in the creation of a new product,process,or service.However,empirical analyses of

253、the effectiveness of income-based RDTIs are still mixed(Bloom,Van Reenen,and Williams 2019),and cost-based RDTIs continue to be regarded as the most common type of tax support for R&D.Koreas hybrid RDTI system features both income-based and cost-based incentives.Cost-based RDTIs were found to be mor

254、e prevalent in Korea.However,Korean policy makers also make use of an income-based special taxation scheme for the transfer,acquisition,and so on of technology that rewards SMEs and middle-market enterprises that successfully commercialize their R&D 34A CAse study on KoreAs r&d tAx InCentIves:PrInCI

255、Ples,PrACtICes,And lessons for develoPIng CountrIesoutcomes.It represents broad coverage of Koreas RDTIs by type of incentive,which could contribute to increasing their appeal and to widening the participation of additional segments of potential beneficiaries.The lack of evidence on the effectivenes

256、s of income-based incentives suggests that their consideration should be treated carefully.The international evidence still suggests that cost-based incentives tend to be effective by inducing more R&D expenditure.Practitioners in developing countries should first consider the use of cost-based tax

257、incentive schemes that are based on expenditures on R&D undertaken by beneficiary firms,but they may also want to consider adopting a hybrid system in the future to promote the participation of additional segments of potential beneficiaries.Direct Support and Project-Based ApplicationParticipation o

258、f young and smaller firms in the schemes through R&D projects occurs when compliance costs are low,particularly for SMEs,and when the monitoring framework is of good quality.Tax incentives are generally delivered through open-ended entitlements that do not require annual pre-spending authorization.R

259、DTI schemes typically allow beneficiaries unlimited amounts of qualifying activity,thereby relieving participants from preapproval requirements.Such schemes may require that,in addition to financial records,beneficiaries keep project documentation for ex post verification purposes.Project documentat

260、ion should be simple to produce,qualify,and demonstratefor example,a record of project narratives and supporting documentation,such as project names;rationale for qualification;meeting minutes;internal reports;test results;and records of technical discussions should be kept.Ex post verification may

261、also require additional documentation,such as job descriptions,department overviews,R&D department mission statements,and descriptions of R&D process overviews.A proper study provides a good case for documentation.However,ex post approval based on entitlement assumes that firms have the capacity to

262、structure R&D projects independently and that they understand at the outset,with clarity,which activities will qualify for claims of tax incentives(received ex post).Even in developed countries,that level of understanding is not always the case.Expanding access to tax experts can significantly lower

263、 the barriers to accessing RDTIs,especially for SMEs and young firms that lack resources for such professional consulting services.In Korea,the National Tax Service(NTS)provides complimentary consultation and mentoring services to taxpayers via phone,mail,fax,the internet,and in person at local tax

264、offices.For example,a firm or its representative can make inquiries via mail concerning a specific question or situation that the firm is facing regarding the application to the RDTI scheme by explaining the situation with supporting evidence and documentation.An authoritative interpretation or ruli

265、ng from the NTS carries legal binding force.Besides the services provided directly by its advisers,NTS provides additional references to professional services by specialized accountants.In developing countries,this level of understanding may be the exception.Evidence from the international schemes r

266、eviewed suggests that inducing firms to prepare R&D“projects”as opposed to allowing firms to qualify R&D expenditures ex postcan be appropriate when a firms A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes35technological capacity is undeveloped and

267、when it is relatively new to conducting R&D investments.Practitioners,however,may not need to choose between the two modalities,as shown by Chiles CORFO(box 3.2).Generosity The generosity of the scheme represents the implied tax subsidy rate:the expected tax relief per unit of R&D investment.Generos

268、ity is important to define,given that it determines the level of incentives available to prospective R&D performers and dictates the overall costs in forgone tax revenues.Reviews from OECD member countries have revealed that the use of tax incentives for R&D and non-R&D innovation has increased sinc

269、e the 2000s as the number of countries using R&D tax incentives has grown,and the generosity of tax credits has also increased(Izsk,Markianidou,and Radoevi 2013;OECD 2009).The evidence from OECD on the use of RDTIs in developed countries suggests that increased generosity leads to high R&D investmen

270、ts(Appelt et al.2016;Khler,Laredo,and Rammer 2012).However,determining the appropriate tax subsidy rate is nuanced.If the overall generosity is too low,the value proposition will be insufficient to lure potential R&D performers to participate.If it is too high,it will introduce distortions to invest

271、ment decisions for R&D,which can lead to resource waste,fiscal strain,and low additionality of impact.Overall,studies(IMF,OECD,UN,and World Bank 2015)suggest that the impact of fiscal generosity is likely to be nonlinear and context specific.First,the proposition of tax relief should be assessed aga

272、inst the general level of corporate tax rates.At the margin,if the corporate tax rate is low,then the level of generosity should be high to offer a meaningful incentive to prospective R&D performers.This calculus,however,is likely to change in the case of multinational companies with the advent of t

273、he GMT agreement,which will impose a de facto minimum tax rate for this segment.Second,and as shown by an existing assessment of a volume-based scheme,increased generosity can lead to an increase in input additionality but only during the first years of participation,showing limited effects in the l

274、ong run.Further,the presence of complementary design features of the scheme,such as electronic applications,carry-over provisions,and voluntary compliance facilities,seems to be more important in motivating the uptake and participation and in generating impact additionality.The following is an inter

275、esting example of how the adjustment of features other than generosity can lead to increased uptake in the scheme.The managers of the Chilean RDTI scheme witnessed a fivefold increase(for the period starting in 2012)in applications during the first year of the introduction of the newly designed prog

276、ram,without modifying the tax subsidy rate.Adjustments removed ceilings of R&D project proposals,which is estimated to have made the incentive more appealing to SMEs(Ministry of Economy,Development and Tourism 2016).Furthermore,the amendments to the program allowed for intramural R&D investments(rem

277、oving the requirement of collaboration with research centers)and simplified the process of proposal applications,offering technical assistance for voluntary certification.36A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes As an indirect measure,targ

278、eting through the RDTIs design is inherently difficult.The review of the literature reveals mixed results.Several reviews show no robust indication of clear benefits to targeting specific firms by ownership,legal form,sector,technology,or geographical region through special provisions in the RDTI sc

279、heme.Several studies,by contrast,suggest that smaller and younger firms respond relatively stronger to incentives than their bigger and older counterparts.Volume-based schemes showed that SMEs experience particularly strong results in impact additionality.Smaller firms tend to suffer proportionally

280、more than larger ones from credit constraints.Evidence from studies in the OECD back this proposition as it shows RDTIs having higher impact additionality for financially constrained firms.The evaluations reviewed from Argentina and China indicate that RDTI seems to be increasingly effective in indu

281、cing R&D investment in large and mature firms,whereas the case of Colombia shows that the RDTI scheme was more effective in achieving investment results among SMEs.Viet Nams heavy focus of its R&D tax incentives linked to foreign investment attraction was a peculiar feature in 2019.Viet Nam provided

282、 an array of inbound investment incentives granted based on regulated sectors,prioritized locations,and project size.The World Banks Innovation Policy Effectiveness Review(World Bank 2021)revealed that,in Viet Nam,tax incentive programs in 2017 represented a disproportionate amount of the total budg

283、et for business innovation policy,accounting for 93.9 percent of its total spending.For one scheme,the forgone tax revenue was associated with a small number of very large firms,implying that the benefits remain highly concentrated in a few participants.Viet Nams RDTI schemes,which focus on promotin

284、g high-tech sectors,take a“positive list”approach to granting incentives.The international literature suggests that targeting specific sectors,regions,industries,or technologies may not lead to the intended results and may even create an uneven playing field at the national level.The incentives for

285、the high-tech sector,for instance,are used by the largest firms in the sector.The incentives for science research and technology development applied only to firms that have been certified as running scientific and technological operations,including incurring R&D-related expenses and employing R&D wo

286、rkers,while registered with a competent science and technology authority(such as the Ministry of Science and Technology).Those eligibility restrictions can limit the beneficiary pool.In addition,although targeting larger firms may reduce proportionally the costs of administering the scheme,limiting

287、eligibility to large firms may distort competition against the smaller players.In the Philippines,firms registered with an investment promotion agency(IPA)are eligible for an income tax holiday of up to seven years for firms classified under Tier III industries outside Metro Manila and up to four ye

288、ars for Tier I industries in Metro Manila.Under the CREATE law,the tier classification is indicated in the Strategic Investment Priority Plan(SIPP),which is either reviewed or amended every three years.The definition of eligibility of R&D expenses for the beneficiary under the enhanced deduction reg

289、ime depends on whether it includes expenses of local salaries of Filipino employees,consumables,and payments to local research and development organizations.In addition,the established practice for expense deductions Targeting A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lesson

290、s for develoPIng CountrIes37requires sufficient evidence,including official receipts,showing the deducted expense and other records showing that such expense is directly related to the trade,business,or profession of the taxpayer.The BOIin coordination with the FIRB,BIR,and other stakeholdersis work

291、ing on the specific guidelines for claiming the enhanced deduction incentive.Indonesia actively targets specific themes and innovation-related activities through RDTI schemes.The tax allowance incentive and RDTI are two different types of tax incentives,featuring different taxpayer criteria and elig

292、ibility(taxpayers using RDTI are not automatically eligible for the tax allowance incentive,and vice versa).The tax allowance is directed toward pioneer industries.Corporate taxpayers that make new capital investments under pioneer industry status are eligible for corporate income tax holidays.The d

293、efinition of pioneer industry is focused on the manufacturing sector.The RDTI scheme is expenditure based and targets 105 thematic activities in 11 focus areas,without any limitation to a specific region.Qualifying firms are eligible for two years of carryover benefit,but the tax loss compensation c

294、an be extended up to five years,as stipulated in Government Regulation 78/2019.Amid efforts in relocating its capital from Jakarta to Nusantara in Kalimantan,Indonesia issued Government Regulation No.12/2023,which regulates fiscal incentives,including RDTI activities that are carried out at the new

295、capital city.For R&D activity in Nusantara,the government gives a larger additional allowance(up to 350 percent)compared with the PMK 153/2020 super deduction tax(up to 300 percent).However,challenges arise in its implementation because the firms must set their operational base,relocating their equi

296、pment and facilities to the new capital before effectively conducting any R&D activity in Nusantara.The review of the international evidence suggests that targeting by region or legal form yields no benefits.Targeting regions may be flawed because gaps in framework conditions can make policy support

297、 unlikely to influence R&D-based innovation and because it may create significant distortions,such as an uneven playing field,which might trigger firms to move their R&D activities to targeted regions.The review of the evidence also suggests that targeting to legal forms can lead to resource misallo

298、cation and create an uneven playing field that hampers the dynamics of economic performance.FDI,Multinational Enterprises Engaged in R&D,and the Global Minimum TaxAccess to foreign knowledge and technology can be important for hosting countries,particularly if they are engaged in export manufacturin

299、g and have the potential for technological catchup.However,a review by the European Union strongly recommends against targeting benefits to large MNEs because they have access to cross-border tax planning and significant access to finance,which can increase their unfair advantage over domestic firms

300、,creating distortions(OECD 2023;OSullivan and Gmez 2022).Empirical analyses confirm that RDTIs play a role in attracting R&D activities to a country,especially in the final stages of location decisions.For the most part,notwithstanding,final 38A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrA

301、CtICes,And lessons for develoPIng CountrIeslocation decisions are driven by economic fundamentals,not by incentives.For example,investors typically favor the availability of scientific knowledge services,the presence of specialized suppliers,the availability of skills,the strength of intellectual pr

302、operty rights,and the access and size of the domestic market,among several other attributes.The general corporate tax rate and the relative presence of similar incentives in alternative hosting locations may also play a role.However,the effectiveness of RDTI schemes will also depend on the internati

303、onal tax rules that are in place.Tax incentives rolled out in different jurisdictions are subject to competition,raising the risk of a“race to the bottom”among countries that are competing to attract R&D from MNEs linked to FDI.This fact suggests that international coordination is key.The GMT and ta

304、x incentives will put international coordination at the forefront of using RDTIs in the policy toolkit for all countries,including the client countries featured in this case study.The GMT is part of an international agreement reached by 139 countries in 2021 that is designed to prevent the race to t

305、he bottom by ensuring that MNEs pay an effective tax rate(ETR)of 15 percent.The GMT will affect countries even if they are not signatories to the agreement.The GMT will primarily affect MNEs.Tax incentives targeted at purely domestic companies will likely be compliant with the GMT.The GMT presents g

306、overnments with an opportunity to transition from profit-based incentives(such as tax holidays)to expenditure-based incentives that induce beneficiaries to perform desired activities,such as investing in R&D.In particular,the substance carveout motivates governments to adjust tax incentives to inclu

307、de features that encourage more expenditures on targeted assets and employment,such as R&D activities,and less on open-ended incentives.On one hand,tax holidays,zero corporate tax,and tax-free zones remain largely incompatible with the GMT.On the other hand,tax credits,accelerated depreciation,and l

308、oss carryforward provisions remain largely compliant with the GMT.Some countries,including Indonesia and Viet Nam,have already taken steps to prepare for the rollout and implementation of the GMT.In December 2022,the government of Indonesia issued regulation PP 55/2022,which governs international ta

309、x provisions and indicates the intention to implement Base Erosion and Profit Shifting(BEPS)Pillar One and Pillar Two in 2023.The Vietnamese government has also made similar moves through Res 115/NQ-CP,dated 7/28/2023,for implementing BEPS Pillar Two in 2024.Increased Participation of Young and Smal

310、l FirmsIn many countries,one criticism of RDTIs is that they tend to benefit larger firms more than smaller ones.That criticism is closely linked to the issue of input additionality because critics argue that large firms would have typically invested in R&D even in the absence of the tax benefits.To

311、 increase efficiency,many countries have contemplated introducing policy features that would make their RDTI benefits accrue more proportionally to SMEs.Widespread evidence indicates that A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes39the partici

312、pation rate of SMEs in RDTIs is lower than that of larger firms.This problem,which has been extensively documented,has several causes,including the inability of SMEs to generate profit in the early years of operation and the high monitoring costs of participation.In addition,the appeal of incentives

313、 could be lower for SMEs because they typically are already subject to reduced tax rates.Furthermore,SMEs tend to be less informed and less aware of those schemes.Finally,the application and compliance costs of RDTI schemes are often significantly larger for SMEs because they may have limited intern

314、al ways to meet the accounting and reporting requirements that participation in RDTIs demands.With concerns about low take-up rates among younger and smaller firms so prevalent in developing countries,practitioners have begun to make efforts to entice their participation.In Colombia,during the imple

315、mentation of the RDTI scheme that was reviewed,the data suggest that the tax benefits favoredand were highly concentrated inmostly large firms,including state-owned enterprises.Yet these larger beneficiaries typically had the capacity to finance and implement substantive R&D projects and to hire int

316、ernational consultants who can assist them in managing the expensive application procedures.To promote participation of smaller firms,the Colombian RDTI scheme introduced a preferential quota that,in any given year,sets aside approximately 15 percent of the entire forgone tax revenue for SMEs.Althou

317、gh that proportion is earmarked for SMEs,if it is not used,it can ultimately be reallocated to large firms.However,not differentiating eligibility by firm size does not mean that practitioners should not be proactive in promoting increased participation of smaller(and younger)firms.The introduction

318、of minimum expenditure provisions in RDTI schemes to reduce the administrative costs for implementing agencies is believed to present the unintended consequence of deterring the participation of young firms and SMEs.Moreover,interviews conducted with Chilean practitioners suggest that despite the ge

319、nerous tax benefits given to firms investing in R&D,many firms decide not to apply.The review of the Chilean RDTI scheme revealed not only that firm investment in R&D was low but also that firms certified only a fraction of what they had invested in R&D and therefore were only able to claim a limite

320、d proportion of the tax incentives being offered.Furthermore,participants disbursed only a fraction of what had been certified.In 2014,only 18 percent of private investment in R&D stemmed from projects that were granted tax benefits.In Indonesia,the Philippines,and Viet Nam,the reviewed RDTIs genera

321、lly took a positive list approach,focusing on firms in high-tech sectors and special economic zones.In addition,“pioneer status”incentives seem to have been widely used to attract investment in advanced manufacturing.For the most part,RDTIs in Korea are broad based,with eligibility criteria covering

322、 a wide range of expenditures and activities.However,RDTIs for specific targets are used selectively,and two RDTI schemes are exclusive to SMEs and middle-market enterprises:(1)special taxation for transfer,acquisition,and licensing of technology,and(2)tax exemption for research provided to investig

323、ators in research institutes affiliated with SMEs or venture businesses.40A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIesTable 3.2 provides information about the former.Details of eligible firms and technologies are prescribed in the law.Table 3.2

324、Special Taxation for Transfer,Acquisition,and Licensing of Technology in Korea Technology TransferTechnology AcquisitionTechnology LicensingFlow of TechnologySME or middle-market enterprises Domestic firmDomestic firm Domestic firmSME Domestic firmForm of Tax IncentiveTax reduction based on income f

325、rom technology transferTax credit based on expenditures on technology acquisitionTax reduction based on income from technology licensingTax Incentive Rate50%of income from technology transferWhen the technology is acquired by an SME:10%of the amount of the acquisitionWhen acquired by a non-SME:5%25%

326、of income from technology licensing Source:World Bank,based on information valid as of December 2020.In the case of tax exemption for research,up to an amount not exceeding 200,000(approximately US$140)per month is exempt from income tax of researchers in research institutes or departments affiliate

327、d with SMEs or venture businesses.Over the past two decades,Korea has continued to enhance special taxation benefits for SMEs while reducing tax benefits for large firms.A result of such continued efforts for SMEs has been a divergence in tax subsidy rates between large firms and SMEs,as shown in fi

328、gure 3.2.According to the OECD R&D Tax Incentives database,Koreas implied tax subsidy rate for SMEs was one of the highest among OECD countries,whereas that for large firms was one of the lowest.Figure 3.2 Implied Tax Subsidy Rated on R&D Expenditures in Korea,200019 0.30B-index2000Large,ProfitableS

329、ME,ProfitableLarge,Loss MakingSME,Loss Making20012002 2003 2004 2005 2006 2007 2008 2009 20013 20142015 20162017 201820190.250.200.150.100.090.00+Source:OECD 2019a.Note:B-index is defined as the present value of the before-tax income necessary to cover the initial cost of R&D investment a

330、nd to pay corporate income tax so that it is profitable to perform research activities(OECD 2009).Countries in the OECD offer more generous terms in RDTIs for SMEs,especially if they are profitable,as shown in the B-index(OECD 2016).Appelt et al.(2016)argue that smaller firms are more responsive tha

331、n larger firms to R&D tax incentives.This assertion is consistent with the view that SMEs tend to A CAse study on KoreAs r&d tAx InCentIves:PrInCIPles,PrACtICes,And lessons for develoPIng CountrIes41Negative Tax(Cash Refunds)and Carry-Over Provisions Innovative firms tend not to make profits in the

332、first years of operation.A“negative tax”option provides firms with cash refunds in case they do not make a profit.In the absence of a“negative tax,”young firms cannot benefit from the tax incentive simply because they have no taxable income.The review of the evidence suggests,however,that young and

333、innovative firms,with restricted profit-generating capacity,should be provided with more favorable conditions to lower the barriers of entry into the scheme.Age,rather than size,is a determinant of dynamism in firms(Criscuolo,Gal,and Menon 2014;Haltiwanger,Jarmin,and Miranda 2012).Obtaining finance is especially difficult for young firms because they lack collateral and a track record suffer from