Recently, I was in a transfer pricing meeting with a prospective customer from a large marketing company. At one point, our R&D tax credit solution came up, and he mentioned how much social research his company conducts, and how none of it actually qualifies for any R&D tax incentives where they do business.
He gave a great example about a significant amount of research they performed to determine how a dishwasher detergent manufacturer could cut down on its carbon footprint. They determined that the absolute most effective way to do so was actually not in the manufacturing process itself, but rather in educating consumers not to rinse their dishes (i.e. using energy to treat, pump, and heat water) before putting them in the dishwasher. His argument resonated with me—this research benefits society greatly, so why would tax authorities NOT incentivize it? He further added that when they spend money on writing a line of code, it qualifies without any trouble.
This got me to thinking—why would governments not incentivize this? There are two main reasons I can think of that contribute to this.
Social research can have unintended consequences. While I fully support the example above, and consider it a noble cause, there is plenty of social research that arguably does not benefit society, and instead creates an additional burden—think of the myriad lobby organizations in the U.S., which fund research to further their own interests. Ideally, governments should not incentivize this type of research.
Along these same lines, we need to consider the root purpose of government tax credits and incentives in the first place. The point of incentivizing R&D operations in their jurisdictions is to attract investment—high-paying jobs, real estate ventures, and so on, which in turn leads to increased taxable revenue and local discretionary spending, benefitting the jurisdiction, be it provincial or federal. Hard sciences arguably have a more correlated impact on these goals, while social research is much less geographically bound. So, in that way, it does make sense that governments do not allow social research to qualify for tax incentives.
