Tax Instruments Supporting Science and Research as a Factor of Economic Growth – Evidence from the Slovak Republic

Abstract

Objective: The main aim of this paper is to provide a united view on the issue of tax instruments supporting science and research in the Slovak republic and to evaluate their impact on state budget revenues.

Research Design & Methods: The research question that this paper tries to answer is whether the support of research and development in the Slovak Republic through tax instruments is sustainable and suitable for the business sector. Qualitative and quantitative methods are used in the research. The paper analyzes legislation related to the issue of super deduction in order to identify the factors that affect this tax instrument. At the same time, the authors adopt the descriptive and normative economic approaches. Based on the deduction, procedures are subsequently chosen to quantify selected factors and their impact on state budget revenues in the Slovak Republic.

Findings: Apart from the last seven years, the Slovak Republic has been characterized by almost no state support for research and development. However, since 2015, new forms of tax incentives have included the provision of tax relief in the form of a deduction of research and development costs, a patent box, as well as tax breaks for new investments. In 2015, 83 entities claimed a deduction of research and development costs amounting to more than EUR 9 million, while in 2019 the amount of this deduction increased to more than EUR 119 million. The statistics of the Financial Administration of the Slovak Republic also show that small companies with 10 to 49 employees apply the deduction to the highest degree, followed by medium-sized companies with 50 to 249 employees, micro-enterprises with up to 9 employees, and large companies with over 250 employees. The highest rate of deduction of research and development cost in terms of regional distribution was recorded in the Bratislava, Trenčín and Trnava regions.

Implications / Recommendations: Tax incentives for research and development encourage investment and are therefore considered an appropriate form of support for the business environment. However, the biggest positive is the duplication of the possibility of claiming costs with respect to the reported corporate tax base. The question arises here: how often should the percentage rate for duplicate costs be changed? The analysis of applicants for a deduction of research and development costs in the Slovak Republic also showed that the number of new applicants for the tax benefit is constantly growing. This may encourage the re-use of such a tax credit in future years. The decrease in the volume of the deduction of research and development costs in 2019, with a 1.5-times increase in its rate, can be assessed negatively. It is clear that the success of this instrument of tax stimulation of private investment in research and development in Slovakia may encounter a barrier such as the inability to claim the costs incurred in the form of a deduction of research and development costs against a sufficient tax base.

Contribution: The question arises here: how often should the percentage rate for duplicate costs be changed? The success of this instrument of tax stimulation of private investment in research and development in Slovakia may also run into the barrier of not being able to claim the costs incurred in the form of a deduction of research and development costs against a sufficiently high tax base, especially in the current period, when there has been a significant decline in Slovak companies’ profits. What, then, is the perspective for deducting research and development costs in the pandemic period and in the post-pandemic period, respectively?