CIR reform: deciphering the changes to be expected
Every year, at the time of the Finance Bill, there are calls to reform the Research Tax Credit (CIR). Too costly, not targeted enough, benefiting large companies too much - the criticisms are legion, and calls for reform of the CIR are relentless. Let's unravel the whys and wherefores of this flagship public support scheme for research and innovation.
Contents
I. The Research Tax Credit, between evolution and perpetuation
- In 1983, a new system was created to finance research.
- A long-term solution and reforms to make it more attractive
II. Why reform the CIR?
- A huge cost for public finances and uneven results
- A system undermined by windfall effects
- A scheme open to all research expenditure, including brownfield projects
III. What to expect in 2025
- European regulations: a brake on certain reforms
- More than numbers, the impact of image
- But the need to optimize public spending
The Research Tax Credit, between evolution and perpetuation
In 1983, the creation of a new system to finance research
The Research Tax Credit (or CIR) was introduced in 1983 by the Finance Act of the same year. At the time, France was lagging far behind other countries in terms of public funding for research. The government introduced a temporary tax incentive to finance increased R&D spending by industrial and commercial companies. The aim was clear: to help companies innovate and invest, by creating a tax niche that rewarded companies developing their R&D centers in France.
In practice, the French government finances a portion of research expenditure via a tax credit (i.e., a reduction or reimbursement if the company is not subject to corporate income tax), based on proof of expenditure incurred. The original text provided for a tax credit equivalent to 25% of the increase in R&D expenditure.
A long-term solution and reforms to make it more attractive
Following a number of reforms designed to make the CIR more incentive-based and maximize its impact, the French government now finances 30% of R&D expenditure up to €100 million, and applies a reduced rate of 5% above this figure. Since the 2008 reform modifying the calculation of eligible expenditure (from expenditure growth to expenditure volume), the total amount of public investment has grown steadily, reaching 7.4 billion euros by 2022.
However, France is still lagging behind the Lisbon Strategy, which called for countries to provide public support equal to 3% of GDP. Far behind Germany (3.1%) and Japan (3.3%), France has been stagnating at around 2.3% for several years, despite having the most advantageous research support scheme of all OECD countries.
Why reform the CIR?
A huge cost for public finances and uneven results
This cost of over 7 billion euros to public finances is one of the main criticisms levelled at France's leading tax niche. What's more, reports evaluating the CIR show that, while it primarily benefits small and medium-sized businesses (84.5% of beneficiaries in 2021), it is large companies that receive the largest amount (42% of the total amount in 2021).
According to its critics, the current research tax credit, which is primarily intended to stimulate R&D within companies, is not showing its full potential impact. Work carried out by economists Philippe Aghion, Nicolas Chanut and Xavier Jaravel (all three professors of economics at the London School of Economics) for the Conseil d'Analyse Économique (2022) has shown that the CIR has twice as much effect when it benefits very small, small and medium-sized companies as when it benefits medium-sized and large companies.
More precisely, while €1 of public subsidy via the CIR would lead to private investment of €1.40 by companies with fewer than 50 employees (known in economics as the "knock-on" effect), this is reduced to €1 for companies with up to 250 employees (summation effect) and even to €0.40 for large companies (substitution effect).
A system undermined by windfall effects
This criticism of the inefficiency of the RTC is similar to the second criticism of the RTC discussed in the figures above: the deadweight loss effect. In the case of the research tax credit, this takes the form of subsidized R&D expenditure that would have been incurred even without public support. According to figures published by the French tax authorities, if only twenty or so companies (all of them large) were to achieve the reduced rate of 5% above €100 million, this would still represent a cost of €400 million to the public purse.
As Philippe Aghion, Nicolas Chanut and Xavier Jaravel point out, "We can reasonably estimate that, even without the CIR, these companies would have spent at least 100 million euros on R&D anyway".
The same is true of the parliamentary information report produced in 2021 by Laurent Saint-Martin, Christine Pirès-Beaune and Francis Chouat, according to which "these companies, whose competitiveness at global level is highly dependent on their ability to innovate, would probably have made these expenditures without tax incentives."
A scheme open to all research expenditure, including brownfield projects
Finally, there is criticism of the possibility that the CIR could be used to finance R&D expenditure that is harmful to the environment. Eligibility for the CIR is based solely on research expenditure, regardless of the subject matter. For example, if a company undertakes research into fossil fuel applications, it will be just as eligible for the CIR as research into renewable energies. To this end, a number of amendments have been tabled to the 2024 Finance Bill, including amendment No. I-2182 by Socialist MP Dominique Potier.
What can we expect in 2025?
European regulations: a brake on certain reforms
However, greening the CIR would be difficult to implement. In the eyes of the European Commission, if a tax scheme becomes selective (and a greening of the CIR would be a selection), it becomes a State aid and no longer a tax scheme. The research tax credit would thus become highly regulated and would be added to other existing schemes such as calls for projects, severely limiting its scope and its power to help companies. In more practical and operational terms, greening the CIR would mean being able to determine "what is green" and what is not, something impossible to establish for all the sectors concerned by the CIR.
More than numbers, the impact of image
The main obstacle to a reform of the CIR would be, more than a question of savings, a question of the image reflected back to investors. The pro-business policy pursued since 2017 has given France a positive image with investors, making it the most attractive country for the fourth year running. To reform, even at the margins, the emblem of the pro-innovation investment policy would represent a very negative weak signal, especially as the CIR is cited as one of the main reasons for France's attractiveness in the eyes of foreign investors.
This is the position of the Finance Committee's general rapporteur, Renaissance MP Jean-René Cazeneuve, for whom modifying the CIR would send "a very bad signal", representing "a very negative effect on the attractiveness of our country for researchers."
But the need to optimize public spending
But with the need to find €12 billion in savings in the 2025 budget, a reform of the research tax credit is on the cards. The most regularly discussed avenues seem to be a lowering of the ceiling from €100m to €20m of expenditure, an end to the doubling of the CIR for young PhDs, or a differentiated rate according to company size. During discussions on the 2024 Finance Bill, several amendments have already sought to impact the CIR.
Whether it's the greening of the CIR, as illustrated by the example mentioned above, or the amendment tabled by centrist MP Charles de Courson (LIOT) to create an intermediate financing rate of 15% between €50m and €100m (adopted by the Finance Committee, then withdrawn in the text adopted via Article 49.3), political ideas for reforming the research tax credit are well represented in the debates at the French National Assembly.
Economists recommend, at the very least, abolishing the reduced rate of 5% above €100 million to increase the funding rate for VSEs/SMEs to 35%, or, more ambitiously, reducing the expenditure ceiling from €100 million to €20 million and abolishing the reduced rate of 5% to increase the subsidy rate for all beneficiaries from 30% to 42%. Ultimately, the idea will not be to make savings at the expense of companies, but to make the CIR more effective and efficient by limiting windfall effects as far as possible and concentrating the scheme on sectors where its impact is greatest.
Sources:
- MESR-DGRI, The CIR in 2021 (provisional data), August 2023
- Laurent Saint-Martin, Francis Chouat and Christine Pirès-Beaune. Rapport d'information de la commission des finances, de l'économie générale et du contrôle budgétaire, Rapport d'information n°4402 - Volume 2, XVe législature, Filed July 21, 2021
- National Assembly. Compte rendu de réunion n° 10 - Commission des Finances, de l'économie générale et du contrôle budgétaire - session 2023 - 2024 - 16ᵉ législature - Assemblée nationale. Assemblée nationale.
Related articles
Romain Escriva
Foresight and Business Intelligence Analyst at Dynergie