This analysis examines the socio-economic effects of introducing an enhanced R&D tax allowance of 130% for companies in Denmark.
The rationale for an enhanced R&D tax allowance is that the knowledge generated by companies’ R&D activities will eventually benefit other companies (spillover effects). However, when the company does not itself benefit from the spillover effects that its R&D activity gives rise to, the company's R&D activity will in principle be lower than what is socio-economically appropriate. Since there is also empirical evidence that such schemes are effective in boosting private R&D activity, the tax allowance could therefore offset the general market economy leading to a low level of private R&D activity.
Research and development (R&D) by companies is a key driver of economic growth and employment. Thus, it is a key task to create up-to-date and competitive framework conditions that make it attractive for companies to invest in R&D activities in Denmark. In this context, it is worth noting that most of the other EU countries currently have an enhanced R&D tax allowance. Thus, a Danish R&D extra allowance could strengthen the fiscal framework conditions for establishing and maintaining R&D activities in Denmark.
The introduction of an enhanced R&D tax allowance of 130% for all companies will result in a structural improvement of the Danish economy. The economic activity measured by GDP rises in the long run to a permanently higher level. Specifically, GDP will be 0.6% higher than the situation without an enhanced tax allowance. This is a significant boost to activity in the economy and results in a higher value creation of DKK 12.3 billion in relation to the size of the economy at present.
An enhanced R&D tax allowance will in itself be associated with an expense for the state in the form of lost tax revenue. The revenue loss for the state is estimated at DKK 1.5 billion per year after mechanical loss and dynamic behavioural response (lasting). The calculation is in accordance with the Ministry of Taxation's method for the preparation of revenue impact assessments.