Tag: Intangibles appendix

TPG1979 Chapter III Paragraph 138

SOME ASPECTS OF THE TAX TREATMENT OF RESEARCH AND DEVELOPMENT Deductibility of R & D expenditures a) R & D expenditures could be either treated as current expenses or charged to capital account. The general rule seems to be that R & D expenditure incurred during the taxable year in connection with a trade or business is treated as an expense and allowed as a deduction in computing profits for tax purposes. The expenditure may be related to a general research programme or to a particular project and the taxpayer may or may not have obtained a patent protecting his development. A tax loss may be carried forward. b) In the United States, the taxpayer may choose the method which is most advantageous to him and may deduct his R & D expenditures as expenses or may charge them to capital account to be written-off in later years. In France, Germany and Switzerland, R & D expenditures which are deductible as expenses have to be treated as such; the taxpayer has no choice. In the United Kingdom R & D expenditure may be deducted as an expense but if as a matter of accountancy practice the taxpayer preferred to capitalise such expenditure and then write it off over a period of years, no objection would be offered. c) The United States rules on deferred expenses are that, in computing taxable income, such deferred expenses are allowed as a deduction rateable over a period of not less than 60 months as may be selected by the taxpayer. The period begins with the month in which the taxpayer first realises benefits from his expenditure. d) However, different rules apply when the R & D expenditure is clearly of a capital nature. Any expenditures for buildings, machines and other assets have to be charged to a capital account, -and a reasonable allowance for depreciation is allowed. In some countries, special allowances are granted with regard to research assets. In France, a special allowance of 50 per cent for buildings used for research is available. A similar allowance, limited to 30 per cent for buildings and 50 per cent for other assets, was granted in Germany if the assets had been bought or produced prior to 31st December, 1974. In the United Kingdom, the whole cost of capital expenditure incurred on scientific research is deducted in a single amount as it is incurred. No such special allowance is granted in the United States, but the allowances for depreciation of property may be considered as R & D expenditures and such expenses may be deferred in the way described in paragraph (c). Moreover in some countries subsidies for research assets bought or produced by a taxpayer are available. A subsidy of 7.5 or 20 per cent – depending on the amount of costs incurred – may be obtained in Germany under certain conditions. Companies for joint research e) Frequently, enterprises group together and create a special enterprise to do research for their common benefit. If this enterprise is established as a partnership, any losses incurred by its research activities may normally be set off against profits realised by the partners themselves in the same country. However, a set-off of profits and losses would often not be possible between enterprises operating in diff e rent countries. In France, a new legal form of a company, the ” groupement d’interet economique ” (GIE), is particularly suited to joint research operations1. If a research entity is formed as a joint stock company, its losses could not normally be set off against profits realised by the individual shareholders. f) Contributions to the capital of a research company would not ordinarily be deductible by the participating enterprises. In the case of a joint stock company, a depreciation of the shares would normally not be allowed. In France, however, the contributions to the capital of research companies which have been approved by the government may exceptionally be depreciated up to 50 per cent by the participants if certain conditions are met. The GIE is a legal entity itself. As there are few binding rules, it can be adapted to various situations by the participants. If a loss is realised, it can be set off against profits incurred by the partners [as in the case of a partnership(” societe “)] ...