The Impact Of Tax Regimes On The Effectiveness Of R&D Allowances - An Investigation Of Separate Taxation And Formula Apportionment Within The Framework Of R&D

Abstract

This study investigates the effectiveness of R&D allowances within the framework of different tax regimes, namely Separate Taxation (ST) and Formula Apportionment (FA). In order to take the characteristics of R&D activities as well as the importance of the labor in R&D activities into account, a model within the framework of principal-agent setting is designed, where the impact of investments decisions is also investigated. In the model, R&D allowances are represented by means of expenditure-based allowances. Because of the analytical limitations, non-linear optimization and genetic algorithm are used for the investigation of the model designed. The outcomes show significant differences between ST and FA regarding the effectiveness of R&D allowances, impact on the compensation of managers and employees as well as on the welfare of owners (or employers). Under both, with and without R&D, FA enables to achieve a higher total surplus (net profit) compared to ST.