Responsible Tax As Corporate Social Responsibility

Definition

Discuss about the Responsible tax as corporate social responsibility.

In the process of continuously looking to improve, the quality of products and services by implementation of innovative and effective methods is the main objective of research and development. Research and development, here in after to be referred to as R&D, is the works and efforts directed by an organization towards improvement of quality of products and services.

There are huge tax incentives for expenditures on research and development by business organizations. The tax incentives include deduction of capital as well as revenue expenditures incurred for scientific research and development initiatives. However, the tax incentives and implications are different for small and large businesses. 

Small businesses are allowed to claim tax deduction up to 125% of the expenditures incurred on scientific research and development activities for eligible expenditures provided the small businesses claim such expenditures in their tax returns. In some cases small business and companies can claim deduction up-to 175% of the expenditures incurred on scientific research and development initiatives (Muller and Kolk 2015). In order to motivate small businesses to spend on R&D activities the Income Tax Assessment Act, 1936 provides the benefit of tax offsets. Small businesses with turnover less than $20 million per annum will be able to claim tax 43.5% refundable tax offset R&D expenditures. However, these expenditures must be incurred by eligible entities to claim the tax offset benefit.

The small business plays an important role in the Australian economy. It provides almost one third of the production and the half of the employment in the private non-financial sector. In order to stay competitive and profitable the small business makes substantial investment in the research and development. The figure provided in Appendix 1 shows the details of implied subsidy rates for different countries. It can be seen that the implied tax subsidy rate of the small profitable business is more than the large profitable firm.

The law relating to R&D expenditures for business entities in Australia has seen a transition from research and development tax concessions to the incentives for research and development expenditures incurred by business entities.

The Business entities prior to July 01, 2011 were allowed to deduct 125% of the total expenditures incurred for R&D purposes at the time of filing of income tax return. In addition to this, the business entities even were allowed to claim deduction up-to 175% in some cases for expenditures that are eligible for such purposes (Yigitcanlar et al. 2017). The tax concession of 125% and 175% respectively for depreciating assets used for the purpose of R&D continues even after July 01, 2011 for those entities that have invested in depreciable assets prior to July 01, 2011. The tax concession of 125% and 175% for eligible expenditures were provided in Division 3A of Income Tax Assessment Act, 1936. The Tax Law Amendment (Research and Development) Act 2011 has repealed the tax concession provisions. Sections 73A to 73Z containing the above provisions have been repealed subsequent to the Tax Law Amendment Act 2011. The amendment has brought tax incentives for expenditures incurred on R&D to replace the R&D tax concessions.

Tax implications

The tax incentives brought in by the above amendment allows business organizations to use the benefit of tax offsets. The tax incentives to allow tax offsets have been introduced to encourage companies, especially small companies. The R&D tax incentives introduced post July 01, 2011 has two-core concepts two it. These two core concepts of tax incentives are as following:

1. Refundable tax offset: For certain eligible expenditures in connection with the research and development activities, an entity will be allowed to take 43.5% refundable tax offset for entities with turnover less than $20 million in a year. Thus, the small business organizations with turnover less than $20 million per annum will be allowed to take 43.5% refundable tax off-set for R&D expenditures which are eligible for the tax offset purpose.
2. Non-refundable tax offset: For all other entities a non-refundable tax offset of 38.5% will be allowed for expenditures of research and development. The small businesses will also be allowed to carry forward the unused offset amount in future income years.

The small businesses are allowed to take R&D tax offset of 43.5% whereas companies with R&D expenditures in excess of $100 million for an income year will only be allowed a reduced tax offset of 30%.

The Tax Amendment Act 2011 (Research and Development) the R&D tax concession provisions have been repealed. However, it is important to restate that the benefits of tax concession provisions of section 73A to section 73Z of the Income Tax Assessment Act, 1936 can still be used by business entities if the necessary conditions are fulfilled by the business entities (Shin 2017). Thus, if the expenditures in respect of R&D activities have been incurred by an entity prior to the introduction of R&D tax incentives then the organizations will be allowed to avail the benefit of R&D tax concession. Thus, if business organizations have incurred expenditures on R&D activities before the repealing of R&D tax concession, i.e. July 01, 2011, then the organizations will be allowed to use tax concession under the now repealed provisions of section 73A to section 73Z. 

In order to address the situations in the income years when both the R&D tax concession provisions and R&D tax incentive provisions special transitional arrangements have to be made.

As already mentioned that subsequent to repealing of R&D tax concessions the introduction of R&D tax incentives is mainly to encourage business organizations to engage in research and development activities to improve the quality of products and services. The tax incentives are more incline and beneficial for small business entities and it is proven from the fact that the refundable tax offset of 43.50% is allowed to the business entities with annual turnover of less than $20 million. As for large business, entities the tax incentive is non-refundable tax offset of 38.5%.

The current tax offset provision under R&D tax incentives that have replaced the tax concession will affect the business entities as following.

From the above table it is more than clear that R&D incentive which has been applicable since July 01, 2011 is certainly more beneficial to small and medium entities than they are to the large corporations.

Tax incentives for small businesses

For small entities with annual turnover, less than $20 million the entities will be taxed at 30.00% with R&D tax offset rate of 43.5% with the option of refund. For smaller entities with turnover, less than $10 million the entities will be taxed at 27.5% and tax offset of 43.5% with the option of refund. For large entities with annual turnover of $20 million or more the entities will only be allowed to take tax offset of only 38.5% for the R&D expenditures. 

As already mentioned earlier that before the introduction of Tax Amendment Act 2011 (Research and development) business organizations were allowed to take the benefit of tax concessions for expenses of research and development. The tax concession provisions were contained in section 73A to section 73Z of Income Tax Assessment Act, 1936. The Division 3A of the act prescribed the guidelines and rates that are applicable for tax concessions under the act to the organizations incurring expenditures on research and development. However subsequent to 1^st of July, 2011, i.e. after the introduction of Tax Amendment Act 2011 (Research and Development) the business organizations have been allowed to take the benefits under R&D tax incentives. Thus, whereas earlier the companies and entities were allowed to deduct 125% of R&D expenditures while filing the income tax return to reduce the income tax liabilities for eligible expenditures now it has replaced by tax offsets. Small entities have been allowed to take refundable tax offset of 43.5% whereas large entities will only be allowed to take non-refundable tax offset of 38.5%.

The above rules and regulations are only restricted to the R&D activities carried out within the country. For R&D activities carried outside the country an entity will only be allowed to claim such expenditures as deduction for computation of assessable income if the activities are registered and the following conditions are satisfied:

1. The activities are of scientific in nature and has close link with the Australian core activities.
2. The activities in relation to the research and development that have been conducted outside Australia is mainly because such activities were not possible to be conducted in Australia for reason / reasons listed in the legislation.

• The expenditure has reduced as the expenditure has been incurred overseas, i.e. the expenditures if would have been incurred in Australia would have been higher than the actual expenditure incurred for the activities in overseas.                

It is important to note here that the expenditures have to be paid in order to be claimed as deduction to ascertain the taxable income of an entity or to offset under the new provisions. Thus, in case the expenditures are incurred but not paid then the R&D tax concession or R&D tax incentives none of the benefits will be allowed under the Income Tax Assessment Act, 1936.

National Innovation and Science Agenda as a part of its program to encourage businesses to invest in research and development initiatives has announced a new tax offset program effective from July 01, 2016. According to the new program the investors will be able to use the benefit of incentives for expenditures which are in the nature of research and development at the early stage of their investments (Farrugia and Gerrard 2016). The eligible investors will be allowed to take the following benefits:

1. Non-refundable tax offset of 20% for the amount of investment subjected to a restriction of an amount of $200000 per annum.
2. Exemption from capital gain tax if the investments are held for a minimum of 12 months and maximum of 10 years.

The above tax incentives for early stage investors is one of the many ways to encourage small businesses to invest in research and development activities. The above incentive program has restricted the tax incentive benefit to the eligible investors. The tax offset in the above scheme has been capped at $50000 to ensure that only small businesses are allowed to use the benefit of the above incentive.         

Conclusion:

The small and medium sized entities are generally short on investment hence, they find it difficult to invest huge amount of funds on research and development initiatives. Thus, it is important to encourage the small entities to spend in research and development activities by allowing them tax incentives for such expenditures. The introduction of R&D tax incentives by repealing the R&D tax concessions was mainly to encourage the small and medium sized entities to invest on R&D activities. A refundable tax off set of 43.5% for entities with annual turnover of less than $20 million compare to a non-refundable tax offset rate 38.5% for entities with turnover of $20 million or more is a clear indication that the current tax legislation has been made to encourage the small businesses to invest in R&D activities.

Reference

Farrugia, D. and Gerrard, J., 2016. Academic knowledge and contemporary poverty: the politics of homelessness research. Sociology, 50(2), pp.267-284.     

Muller, A. and Kolk, A., 2015. Responsible tax as corporate social responsibility: the case of multinational enterprises and effective tax in India. Business & Society, 54(4), pp.435-463.

Shin, M.J., 2017. Partisanship, Tax Policy, and Corporate Profit-Shifting in a Globalized World Economy. Comparative Political Studies, p.0010414016688007.

Yigitcanlar, T., Sabatini-Marques, J., da-Costa, E.M., Kamruzzaman, M. and Ioppolo, G., 2017. Stimulating technological innovation through incentives: Perceptions of Australian and Brazilian firms. Technological Forecasting and Social Change.   

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