The IID is making headway and attracting interest. It provides a tax deduction of 85% on net innovation income. Essential, but to be exploited to the full. Nothing is automatic and everything is based on a methodology and precise calculations. Focus on the backstage of the IID…
Belgium offers many advantages in terms of R&D tax incentives. The principle of the innovation income deduction (IID) is not complicated, but its application requires specialised expertise, requiring scientific, financial and legal-tax knowledge. After checking whether the company that owns the intellectual property right is indeed eligible, it remains to dive into the equation and calculate the potential benefit precisely. Supporting arguments.
The IID formula
The IID acts on the net innovation revenues, limited if necessary by the nexus ratio. The challenge of IID – equivalent to 85% of net innovation revenues – lies in the precise identification of the unknowns in the following equation:
Net innovation income = (a – b) x nexus ratio
a = the amount of gross innovation revenue.
b = the amount of R&D expenditure incurred during the taxable period and any historical costs. Nexus ratio
= (the amount of qualifying expenditure/total amount of R&D expenditure) x 130
The higher the gross income, the greater the benefits of the IID.
The lower the R&D expenditure over the year, the more attractive the tax gain.
Not to mention the potential negative impact of the nexus ratio, which can easily be avoided. The challenge is therefore to make the most of your tax base by “playing” with these variables. For an optimal and risk-free result. How to isolate the share of turnover linked to software and how to proceed when software and hardware are linked… and finally, how to optimise the global expenses and minimise the effects of the nexus ratio?
Step 1 : « eligible » gross income
Not all innovation revenues are relevant for the IID. An example? Inputs generated by a support or maintenance service cannot be counted. Or those attributed to establishments located abroad.
- The scope of the IID includes licence fees, compensation due to the company for the infringement of an intellectual property right or amounts obtained from the disposal of the product. It is therefore interesting to screen the turnover to distinguish “qualifying” income from other income…
- But that’s not all: these receipts must have originated after 1st of July 2016. This is not easy if the development of your computer programme started before this date and continued beyond. The solution may lie in applying an annual coefficient, but caution is called for. Any choice must be duly justified to the tax authorities.
- Objective: gross innovation revenues. Direct and indirect costs not related to R&D must be deducted from this revenue.
Step 2 : your R&D expenditures in the past and present
The objective is to determine the net innovation income and then to identify the R&D expenses incurred during the taxable year, in order to deduct them from the result. This includes all costs directly related to innovation activities, but also any acquisition costs.
- Spreading the “past”? Historical R&D expenditure must also be taken into account (under certain conditions). This is one of the particularities of the IID: it is necessary to choose to spread, over a period of seven years (maximum), the sums previously incurred. This is a way of avoiding tax penalties. The choice of spreading methods is irrevocable.
- Any negative balance (the difference between gross income and R&D expenditure) can be carried forward to the next year.
Step 3 : nexus ratio
The purpose of this ratio is to “fiscally” value the R&D activities carried out by a company or outsourced to an independent subcontractor on its behalf. If the intellectual property right is the result of internal innovation, the nexus ratio will not penalise the application of the IID. Conversely, if the “innovation” was acquired from a third party or developed by a related company, then the tax incentive will be less advantageous. It remains to be quantified, based on the following formula:
the amount of qualifying expenditure nexus ratio = ——————- x 130% total R&D expenditure
The calculation of the nexus ratio is not without its subtleties, including the possibility, under certain conditions, of increasing the allowable eligible expenditure by 30% (with a maximum of 100%). This coefficient is a rebuttable presumption: this means that it is possible to challenge its application if the company considers the deduction to be too low. A view that must be justified.
- “Qualifying” R&D expenditure. It is not the nature of the costs that will be taken into account, but rather their allocation. This includes all costs related to the development of intellectual property (IP) during the taxable period, with the exception of interest, property costs and general R&D costs. It does not matter whether these costs are borne by the company or invoiced to a non-group company.
- Total R&D expenditure. To these “qualifying” costs must be added all other costs related to the acquisition of a patent or software, as well as efforts outsourced within the group (an associated company). Obviously, the higher the numerator, the more negative the impact of the nexus ratio.
Simple, like saying IID
Once all the unknowns in the equation have been identified, the 85% deduction on the amount of net innovation income should be applied to determine your tax benefit. This requires a careful and consistent methodology. Among other things, because the company’s approach and decisions will be scrutinised by the tax authorities. The regulations require a robust process for tracing income and expenses. An obligation that requires preparation.
It would be a real shame to do without the IID. In addition to activating the device, it should be maximised. This is because the company has enough leeway to hope to maximise your related gains.
By “playing” with the variables in the equation :
- increase its profit margin, making the most of the revenue generated by innovation;
- lowering R&D expenditure;
- modulate differently the shares of hardware and software on the invoices;
- opt for a licensing or SaaS (software as a service) model, with retention of intellectual property where the current emphasis is on contractual R&D;
The key to IID is to make the most of innovation efforts. An optimisation exercise that must be carried out in the present, but also prepared and planned for the future with your MoneyOak partner.