Estonia, Latvia, and starting from this year Poland (partly) are taxing profits earned by companies only at the dividend payout time. Such a model promises to raise both domestic and foreign investment, and it can help the economy recover from the crisis more quickly.
The opponents of this taxation system in Lithuania argue that various benefits, which alleviate the burden on business and encourage investment where it is most needed, are already in place. However, these measures are available only to a small fraction of economic operators, and they increase the bureaucratic burden in both private and public sectors. In terms of investment in research and development, we are still far behind the European Union average.
With the corporate tax credit for research and experimental development (MTEP [R&D]), those costs are tripled and deducted from the taxable income.
For example, if a company had a 6,000 EUR expenditure, from which 1,000 EUR was for MTEP (R&D), the total expenditure will be considered as 8,000 EUR. If the total income were 10,000 EUR, then only 2,000 EUR would be taxable, as opposed to 4,000 EUR if the tax exemption were not approved. This reduces the share of income that will be subject to the income tax.
It all sounds great and such incentive is expected to encourage research and experimentation, focused on the acceleration of scientific progress and more efficient solutions in product development. However, by taking a closer look, one can get a grasp of the dangerous manifestations of bureaucracy.
The concept of research and experimental development can be interpreted differently. According to the law on Science and Studies of the Republic of Lithuania, research and experimental development is a systematic, creative activity for the cognition of nature, humanity, culture, and society, and the use of the results achieved by such activity.
This concept does not cover the acquisition of new knowledge or development of new products but in a situation where a production method is completely new to a company but has long been used by another, the first company would not be able to use the benefit in Lithuania.
However, Lithuanian institutions divide MTEP (R&D) into three types: fundamental research (dedicated to gaining new knowledge about the essence of certain phenomena and/or observed reality), applied research (experimental or theoretical work dedicated to acquiring new knowledge, devoted to achieving practical goals), experimental activities (aimed towards developing new products or processes to improve already developed products or processes).
Such restriction on research and experimental activities significantly reduces the potential use of this benefit by economic operators because even if an economic operator is carrying out scientific research, it is not necessarily “new” and has not yet been applied by another economic operator. There are uncertainties and additional criteria that can be assessed differently by the experts of the Agency of Science, Innovation, and Technology (MITA [ASIT]) based on their experience. These assessments are not necessarily in favor of an economic operator.
A very small number of economic operators benefit from the MTEP (R&D) incentive. Only around 1% of Lithuania’s gross domestic product is created through research and experimental development. According to the data, presented by the Department of Statistics, in 2019, there were 1,028 companies engaged in such activities in Lithuania.
According to MITA (ASIT), in 2018, only 204 companies benefited from the MTEP (R&D) incentive, and only 48 companies applied for an MITA (ASIT) expert to assess whether the costs could be attributed to research and experimental development.
Thanks to the benefit, companies managed to save about 9,300,000 EUR, which is 45,000 EUR per company, on average. This means that MTEP (R&D) cost recognition processes are generally inaccessible to most economic operators, and for those who have access to them, they are too expensive, and the advantages of applying for the benefit are relatively small.
The process of applying for the benefit and reducing tax costs is very bureaucratic and requires a considerable amount of resources. There are several cases when a company is not obliged to submit MTEP’s (R&D’s) conclusions for the possibility of getting the benefit.
For example, if a company has carried out research activities together with research institutions, they can benefit from the MTEP (R&D) benefit. Also, companies that carry out MTEP (R&D) activities on a constant basis can declare costs as MTEP (R&D), if they have employed two experts that have gone through selection and are registered in the MTEP (R&D) database of experts.
In other cases, applications need to be submitted to MITA (ASIT), for the evaluation of MTEP (R&D) activities, which results in even more administrative costs. For example, an economic operator must have documentation of MTEP (R&D) work approved by the head of the tax unit or his authorized person, which describes the MTEP (R&D) work performed by the company (objectives, course of implementation, other relevant information).
Thus, to get the benefit economic operators must either apply for an assessment or employ two specialists to monitor the process from the inside. The fact that such processes are too complex and require too many resources is clear from both the small number of beneficiaries and the relatively small share of “saved” taxes per average beneficiary company.
At first glance, a benefit in favor of investment, innovation, and research brings a great deal of red tape when it comes to the monitoring or evaluation by the public authorities, or even the need to employ people to be accredited by the supervising authority.
Therefore, such a benefit does not perform its essential function of encouraging scientific and technological progress by reducing the tax burden on economic operators. In Lithuania, the Estonian corporate taxation model is needed not only because we are the last in the Baltics region not to have already introduced it, but also because the existing benefits are not a accessible to everyone who seeks to improve production processes.