VAT Reclaim and International R&D Collaborations

International collaborations on research and development can bring companies a wealth of knowledge and resources. Yet, despite their significant benefits, they often come paired with a plethora of complex VAT regulations and reclaim processes. 

So much so, that many organisations that carry out international R&D consider most expenses as part and parcel of R&D rather than having to navigate the reclaim process. However, in an increasingly competitive and global business environment, organisations can no longer afford to leave significant savings unrecovered.

This blog post looks at the R&D reclaim process for companies engaging in international R&D collaborations and how to best navigate the process. But first, let’s look at what constitutes R&D. 

What is R&D?

In a fast-growing and innovative economy, many business activities could be considered Research and Development (R&D). However, when it comes to identifying and quantifying R&D activities, for tax purposes, it tends to become challenging. Regarding revenue guidelines and legislation, a few core guidelines create a firm foundation to gauge the eligibility of R&D for VAT purposes. Generally, R&D activities must: 

• Be experimental, investigative or systematic in nature
• Fall within a field of revenue-approved science and technology.
• Involves research and experimental development. 
• Aim to achieve scientific or technological advancement.

Top considerations for managing international R&D collaborations

Ultimately, the country your organisation collaborates with will largely impact the overall VAT treatment and reclaim opportunity. To help maximise your R&D VAT returns and savings, there are a few key considerations to keep in mind when choosing the country you’d like to engage with for R&D purposes. 

Consider the net cost of R&D

Consider the relative costs of performing R&D in a specific country compared to another. This includes considering the net of respectively available incentives and evaluating the circumstances and resources needed for the R&D activities required to take place.

Consider the country-specific tax benefits

Consider the tax incentives per country and how it attracts and encourages investments and exports. For example, many countries provide tax credits for taxes paid by a resident business to other countries or offer additional tax incentives. The net cost can significantly impact whether or not these benefits will add value to your R&D.

Consider the transfer pricing

Regardless of the specific strategy adopted for R&D activities and IP ownership, transfer pricing rules will still significantly impact the process. Generally, transfer pricing rules, within international R&D collaborations, price intra-group arrangements similarly to arrangements between unrelated parties. These pricing rules can become increasingly complex to navigate within a multinational group. 

Managing R&D collaborations

Although international R&D collaborations can feel daunting, in a globalised business world, it has become evident that high-quality R&D is a critical part of long-term success. If your organisation heavily relies on undertaking R&D incentives, maximising your tax savings provides a significant opportunity to support growth and profitability and allows you to invest more into  R&D activities. 

Common errors for reclaiming VAT on R&D

Although the process of reclaiming R&D costs can be complex, a few common errors could hinder your organisation from tapping into eligible reclaim opportunities. Some of the most common mistakes include the following: 

• Overlooking suitable activities and undervaluing your claim.
• Incorrectly identifying R&D activities and non-accordance with the relevant tax legislation and Revenue guidelines.
• A lack of supporting documentation to justify R&D claims. 
• Not following the correct Revenue-approved filing procedures. 

Navigate cross-border reclaims with experts in your corner

If your organisation is involved in cross-border collaborations, it’s critical to ensure that nothing gets lost in translation, including significant reclaim opportunities. Get in touch with our VAT IT experts, offering an unparalleled understanding of all legal requirements across all jurisdictions for optimal VAT reclaim opportunities.