Last week the EU adopted a new framework for state aid intended to make it easier for governments to bolster research, development and innovation without infringing EC Treaty state aid rules.
The Framework sets out a series of guidelines for specific types of state aid measures – such as aid for R&D projects, aid to young innovative enterprises and aid to innovation clusters – that could encourage additional R&D&I investments by private firms, thus stimulating growth and employment and improving Europe’s competitiveness. These guidelines allow individual Member States to tailor aid measures to particular situations, subject to the overall test that the aid must address a defined market failure, must be well designed and that the identified benefits must outweigh the distortions to competition resulting from the aid. The new Framework is due to apply from 1st January 2007.
EU Competition Commissioner Neelie Kroes said: “Thanks to the Commission’s new R&D&I Framework, Member States should find it easier to use state aid to boost private sector R&D and innovation projects. The Framework is an important contribution to the Strategy for Growth and Jobs. It is now up to Member States to take full advantage of this opportunity.”
At the same time, the European Commission adopted a Communication on the more effective use of tax incentives in favour of R&D in order to boost R&D investments and enhance job creation and economic growth in Europe. The Communication clarifies the legal conditions arising from EU case law and sets out some basic principles and good practices for the design of tax incentives for R&D. It encourages Member States to improve the use and coordination of tax incentives on specific R&D issues.
"R&D is vital for our economy and competitiveness in a more and more globalised world. I am convinced that tax incentives promoting R&D would make Europe more competitive and help create more jobs and growth when coordinated among the Member States" said Commissioner László Kovács. "I invite Member States together with industry and researchers to embrace a more consistent and favourable tax environment for innovation and cooperation across borders.”
"We have identified tax incentives as way of encouraging more private investment in R&D,” said European Science and Research Commissioner Janez Potocnik. “We want to break down the barriers that prevent companies and researchers working together across internal borders and so create a European Research Area. A common approach to tax incentives would be a good step in the right direction.“
The EC says that European companies must invest more in research, development and innovation (R&D&I) if they are to compete globally. The most important way to stimulate innovation is by fostering effective competition. Competition in free and open markets pushes firms to innovate, as this is a way for them to improve and differentiate their products, increase their appeal to customers and thereby survive competitive pressures. However, there are situations where markets on their own fail to ensure optimum levels of R&D&I and where state aid or tax incentives may be needed.
The new state aid framework is based on the refined economic approach developed in the State Aid Action Plan and in the Communication on State Aid for Innovation. Whereas the current Framework is limited to aid for R&D, the new Framework also includes aid for innovation projects. It explains that a state aid measure for R&D&I will be authorised on the basis of a three-part test:
The Framework outlines the main market failures hampering R&D and innovation: knowledge spill-overs, imperfect and asymmetric information, coordination and network failures. It then gives guidance on a series of types of state aid measures that can address these market failures without excessively distorting competition and trade.
Member States can tailor this package to support R&D&I according to their national preferences, needs and specificities. The Framework indicates to Member States how they can use the following types of measures in conformity with the state aid rules:
The new Framework also aims at improving the Commission’s control of state aid, by allowing it to focus on the cases most likely to give rise to distortions of competition. As a result, it introduces a detailed assessment for cases involving high aid amounts, with a consequent higher risk for competition and trade.
State aid is in principle prohibited by the EC Treaty unless it is authorised by the European Commission. The Commission issues guidelines and frameworks to facilitate the work of Member States by announcing in advance which measures it will consider compatible with the common market, thus speeding up their authorisation.
As regards tax incentives, the Commission clarifies that tax incentives which restrict their benefits to activities performed domestically are incompatible with the EC Treaty and offers guidance on the main design options, features and relevant factors which Member States may wish to follow when designing or updating their R&D tax incentive schemes.
These include, for example, ensuring that tax incentives are easily accessible for a broad range of R&D firms, including elements of simplicity as well as low administrative and compliance costs, and the need for delivery to be timely, efficient and predictable.
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