Published online by Cambridge University Press: 26 May 2021
1. An innovation is the application of a new or significantly improved product (good or service) or process; a new marketing method; or a new organisational method in business practices, workplace organisation, or external relations. It involves the realisation that products, services, means of production, marketing strategies, delivery methods, and business structures do not take a fixed form but rather are subject to change, either incremental or radical. This chapter concerns innovation policy and what governments ought to do to secure the process by which companies inject novelty into the market. Therefore, it deals with different legal rules for commercial innovations. It does not deal with the underproduction of basic research within an economy or, for instance, the task of the state to produce basic research. Our economies have been engaging with innovation at a rapid pace, and research now revolves around the question of how the tax code can streamline and promote this evolution. Governments have adopted this goal: to ‘promote innovation, encourage the development of new technologies and increase the fund of human knowledge’. Tax law is seen as one of the main toolkits by lawyers, economists, and policy-makers. National economies are competing internationally for the price of the most innovative economy, and our tax codes have been subject to fierce innovation too. In a political environment where governments are pushed to ‘create growth’, favourable R&D treatment has now turned into the panacea of innovation policy. Favourable R&D treatment, such as the allocations of R&D to foreign income, the R&D tax credit, the R&D favourable deduction scheme, and patent boxes, are seldom-contested tax expenditures that are the biggest tax expenditures for many big economies.
2. Western legal systems follow the OECD and the World Bank and welcome tax incentives for research and development (R&D) as a sound innovation policy. In the European Union, nearly all Member States adopted tax subsidies for R&D expenditures. Belgium recently enforced and reformed its incentives for innovation, hereby following the Base Erosion and Profit Shifting initiative from the OESO.