24/01/2008- Brazil's Technological Innovation Incentives – Time to Invest
Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service". Peter Drucker (1987)
. Introduction
The fast and unilateral opening of the Brazilian market in the beginning of the 90’s made many Brazilian companies vanish into the air. Amongst those that survived, many started to adopt better management techniques and international quality standards to ensure their competitiveness.
With the advent of the new millennium, management and quality continued to be necessary for companies to survive. Nevertheless, the number of sectors in which these requisites are not sufficient is growing. In these sectors, technological innovation is the new paradigm of competitiveness.
The new trajectory of development requires public policies that increase productive efficiency, decrease vulnerability face foreign currency and stimulate investment.
Japan started to rely on tax and financial incentives for company-focused technological innovation already in the 50’s, while Korea started activities in this area in the end of the 60’s, followed by India ten years later. Even Costa Rica, in the mid 90’s, made a strong entry in international competition to attract investments and was able to transfer countless projects to that country.
Following this policy and based on the most consecrated global technological innovation incentive projects, the Brazilian government enacted laws to help companies to develop and invest in technological innovation.
You will be able to see that the scope of this type of legislation is to stimulate companies to make investments, generating gains in cash flow for the same.
The most important rule enacted to help companies specifically to design innovations was Law No. 11.196 of November 21, 2005, known as the Goods Act, which in its Chapter III, articles 17 to 26, regulated by Decree No. 5.798 of June 7, 2006, consolidated the tax incentives that companies can enjoy automatically, provided that they promote technological research and development of technological innovation.
This Law is intended to stimulate private investments on technological research and development, which are decisive to increase the level of competitiveness of Brazilian companies of any sector and offer benefits to companies that search for technological innovation projects, in other words, investments that seek to increase the technological qualification of companies that generate quality and productivity gains for the same.
The Industrial Technological Development Program – PDTI and the Industrial Agricultural Development Program PDTA, instituted by Law No. 8.661 of June 2, 1993, were the first tax incentive packages established to stimulate technological research and development activities in Brazilian companies. More recently, in Chapter III of Law No. 11.196 of November 21, 2005, these incentives were perfected in order to boost companies capacity to internally develop technological innovations, whether by conceiving new products or adding new functionalities or characteristics to the product and manufacturing process, as long as the result reached is a gain in quality or productivity for these companies, in order for them to have better conditions to compete.
The concept given to what is considered technological innovation was the first great advantage of said Law and Decree. Under the terms of the law, Technological Innovation is the conception of a new product or manufacturing process, as well as the aggregation of new functionalities or characteristics to the product and process that implies on additional improvements and an effective gain in quality or productivity, resulting in greater competitiveness in the market, in other words, any innovation in the manufacturing process or product that results in quality or productivity gains may be considered a technological innovation entitled to tax incentives.
In addition to the concept described above, consisting of § 1 of art. 17 of Law No. 11.196/2005, Decree 5.798/2006 brought other definitions applied to the concept of technological innovation, which further expand the possibility to obtain qualification under the law.
Among the legal incentives, the highlight is the one that establishes that in the determination of the actual profit for calculation of the Corporate Income Tax — IRPJ and the calculation base of the Social Contribution on net Profits — CSLL, the company may exclude an amount corresponding to 60% of the sum of expenses incurred in a technological innovation project. This percentage may reach 80% depending on the number of researcher employees hired and it is important to note that no researcher needs to be hired in order to enjoy the minimum 60% limit of deduction of expenses. Moreover, there may also be the exclusion of 20% of the total expenses incurred in a technological innovation project under a patent granted or registered cultivated plant varieties.
The Law also allows the direct deduction of 50% (fifty percent) of the Excise Tax (IPI) that should be paid on the purchase of equipment destined to innovation. This deduction is made directly on the purchase and, therefore, this amount is not paid, generating an effective gain in cash flow.
In addition to the tax incentives, the Goods Act enabled the federal Government to grant part of the compensation of researchers, with masters and doctorate titles, employed in R&D activities in companies.
The advantages from this law are many, but the most significant are those that do not require any approval for the technological innovation projects, in other words, the benefits can be enjoyed automatically ? the obligation to submit a standard report to the Ministry of Science and Technology is absolutely for statistical purposes.
There is also no sector or time limitation, but this also creates a problem because it may be revoked at any time so, therefore, now is the time to invest!
The difficulty to apply the Law to the concrete in the majority of times is to clearly define what is Technological Innovation in the company, considering that the legal definition of technological innovation is wide-scoped.
It is also necessary to ensure the projects’ qualification under the Law, that is, document the company, clearly demonstrating that what was benefited is effectively a technological innovation and that the company complied with what the Law intended, thus, considering that there is no need for approval of the projects, we understand and recommend that project management reports be prepared in relation to the expenses declared with the project’s activities.
The work suggested has on the last instance the realization of an Audit of the Innovation for the purpose of maximizing the gains with tax incentives, searching within the company what is and what is not an expense with Technological Innovation within a development plan and create a report with technical, legal and accounting support for enjoyment of the incentives, in order to ensure the safe enjoyment of the incentives that, in our opinion, are the most beneficial that Brazil has ever offered to companies.
Source: Almeida Advogados