Tax

The impact of innovation tax

What are the key considerations for a tech firm’s future growth location?

When thinking about future growth locations, today’s scaling digital technology companies are more likely to think about attracting the best talent and gaining funding than considering tax. But for an ambitious technology firm you must pay attention to a country’s innovation tax regime. It will have important future effects for both innovation and talent as the business grows.

The value of many of today’s fast-growing technology firms is rooted firmly in their intellectual property. For these businesses, the ability to innovate and to stay ahead of the competition can secure their path to global expansion.

Innovation across borders

Seizing the power of digital to transcend geographic boundaries makes successful technology firms thrive. And the same principle applies to their approach to innovation. The talent needed to carry out research and development (R&D) cannot always be found where the firm’s central research function is located. But is tax legislation that determines relief available for R&D expenditure keeping pace with the changes in how companies are using R&D?

Three areas covered in more detail in this article are:

Innovation tax and the growth journey

During the earlier stages of growth, ambitious technology companies typically seek to re-invest their revenues in further innovation as they attempt to achieve market dominance and international expansion. This can come at the expense of profit.

Getting strategic

In the start-up phase, strategic decisions about location and investment will be driven almost entirely by the business model. Yet as technology firms move out of the Small and medium-sized enterprises (SME) phase and get bigger, they should factor tax into such decisions.

Maximising the tax advantage

The competitiveness of a country’s regime will need careful consideration. Businesses will be seeking benefits that are aligned with their innovation models, investment and growth models, and that are straightforward to access. The treatment of IP by a particular regime may become a more important factor in their strategic decision-making too.

Jurisdictions with innovation tax regimes that deliver in all of these key areas will be increasingly attractive growth areas for the technology sector when building out their R&D functions.

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