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AstraZeneca's Submission in Response to Joint Finance Canada – Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:
November 30, 2007
Peter C. Armstrong
Joint Finance Canada – Canada Revenue Agency SR&ED Consultations
140 O'Connor Street
Tax Incentives for Scientific Research and Experimental Development
Consultation Paper, October 2007
Submission by AstraZeneca Canada Inc.
Dear Ms Horsman and Mr. Armstrong:
We welcome the opportunity to present our views on how to improve the SR&ED program and assist the Government of Canada in meeting its objective of increasing private sector investment of research and development in Canada.
AstraZeneca group of companies (AstraZeneca) is one of the world's top five ethical pharmaceutical companies, active in more than 150 countries, and employing over 65,000 employees worldwide engaged in the research, development, manufacture, marketing and distribution of pharmaceutical products, and the supply of healthcare services. During 2006, the group achieved global sales of $USD 26.5 billion.
Our business is focused on seven important areas of medical need: oncology, cardiovascular, central nervous system, gastrointestinal, infection, pain control and anesthesia and respiratory.
As one of the world's leading research-driven organizations, AstraZeneca spent close to $USD 3.9 billion on research and development (R&D) in 2006 and employed over 12,000 employees world-wide in countries such as UK, Sweden, US, Canada, France and India.
During 2006, AstraZeneca Canada (AZC) spent over $CAD 100 million in R&D, and employed over 150 staff at our basic research facility in Montreal and over 150 staff, overseeing clinical trials, at our Mississauga head office and throughout the country. AZC further supports thousands of physicians across Canada working in various capacities as part of our clinical trial program.
One of the contributing factors in allowing AZC to attract this level of investment has been Canada's generous Scientific Research & Experimental Development (SR&ED) tax incentive program. However, due to increased globalization of research and development programs, AZC's ability to attract additional dollars to Canada is being frustrated due to the narrow focus to which the program is being applied. Please see our comments in response to your questions below.
How do the SR&ED tax incentives affect the performance of R&D in Canada, and how can they contribute to increasing private sector investment in R&D?
As part of a global organization, a number of key criteria are used in decisions on where to place R&D around the world. These include:
- The quality of labour available within a specific country; such as research scientists, medical doctors, medical specialists and key medical opinion leaders;
- The cost of that labour;
- The speed of execution at which research can be performed;
- Access to Centres of Excellence for research, such as universities, research institutes and teaching hospitals; and
- Access to market.
While tax incentives are not a primary criterion, it is an important factor as it impacts the cost of labour. With the high Canadian dollar and the increased medical sophistication of low cost research producers of Eastern Europe, China, India and Latin America, Canadian tax incentives have assisted AZC in remaining competitive in face of such strong competition.
AZC is ever vigilant of R&D initiatives of other countries. As noted in the consultation paper, Canada has one of the most favorable tax incentives regimes, a fact that we exploit when addressing our global colleagues for R&D investment.
While the cost of tax incentives may appear high, an estimated $3.3 billion CAD for 2007, by the government's own admission, they return a net benefit to Canadians of 11%. For each dollar of tax incentive issued, $1.11 is returned through spill over effect. This spill over effect directly impacts the quality of scientific labour in Canada by providing employment to highly qualified scientists and medical practitioners, as well as supporting Centres of Excellence, both key criteria for attracting global R&D investment into Canada.
The government should continue to administer and enhance its generous R&D tax incentives in order to maintain and increase private sector R&D investment in Canada.
How could more private sector R&D be leveraged?
The 1983 budget document which created the current SR&ED tax incentive regime, stated that:
€œThe private sector is in the best position to determine the amount and type of industrial research and development that it should undertake. Any firm's research and development projects have to make business sense; the results need to be marketable, and the project should be profitable. Thus, the incentive structure for research and development should continue to contain general measures, such as broad-based tax incentives, that leave day to day decisions on research and development projects in the hands of the private sector.€
However, the current SR&ED tax incentive sections of the Income Tax Act, and its administration, have not kept up with developments in R&D that are occurring in the private sector. These developments reflect the day-to-day project decisions made by the private sector, which should be leveraged by the government to ensure the greatest impact on Canadian R&D for tax dollars spent. These include: the growing trend of globalization of R&D; new fields of science; refundability of SR&ED tax credits; and, clinical trial results meetings.
Globalization of R&D.
As a member of a global research organization, AZC derives most of its R&D work through other affiliates. This global approach to R&D allows for better management of R&D inherent risks and provides an opportunity for Canadian researchers to collaborate on novel research projects that they would not normally have partaken in. This globalization of R&D is not specific to AZC. As noted by the OECD:
€œThe surge in the internationalization of research is corroborated by multinationals' recent patterns of investment, R&D performed abroad and by foreign affiliates represents on average well over 16% of total industrial R&D expenditure in the OECD area. Furthermore, the average R&D intensity of affiliates under foreign control is higher that the R&D intensity of domestically controlled firms in most countries€
However the narrow wording of the act, focusing solely on SR&ED €œcarried on in Canada€ and based on policy objectives of an earlier time, ignores the increasingly global nature of R&D. This narrow focus has negative consequences for research in Canada. It has impeded Canada's ability to lead worldwide research projects. It has also resulted in the rejection of SR&ED tax claims for Canadian work.
Canadian researchers are achieving worldwide recognition for the work they perform. However in order to achieve greater success and innovations, Canadian researchers need to be able to lead and run global research projects out of Canada. Such projects would inevitably mean that a portion of the work, and its associated costs, would be performed outside Canada. Currently, such out of country costs are deductible to the Canadian entity. However, this is not unique to Canada. Other countries, which carry on significantly greater research than Canada, such as Sweden, also allow for such deductions. In order to assist Canadian researchers in leading such global work, the Department of Finance must provide recognition of such costs, in the calculation of the SR&ED tax credit.
Currently, only the following out of country costs are eligible for the SR&ED tax credit:
- €œacquisitions of equipment or materials used in SR&ED in Canada€;
- €œtraining for SR&ED carried on in Canada€; and
- €œvisits to foreign customers in respect of SR&ED carried on in Canada to update the customer on the SR&ED project's status€
Recognition of other more substantial out of country R&D costs, such as out of country meetings and related travel costs, and costs associated with out of country R&D work directed by Canada, would assist Canada in remaining competitive, and attract and enhance the type of R&D that is performed in Canada. It would also assist in meeting another policy objective of the original 1983 budget in creating jobs, particularly in fields where Canada currently is not a world leader, such as in Biostatistics science.
The globalization of R&D has not only impacted primary global research organizations such as AstraZeneca, but has also affected the contract research organizations (CROs), which service such companies. In order to meet the demands of primary global research organizations, CROs from around the world have merged, in an effort to become more effective and efficient. This efficiency has usually resulted in such organizations centralizing their office administration function to save costs. This centralization of administration, which has no bearing on the worked performed in Canada, has caused the Canada Revenue Agency (CRA) to reject some AZC SR&ED tax incentive claims. While the work performed by such CROs is performed in Canada and can be verified (and has been acknowledged by CRA's own science officer and auditor as being performed in Canada), the fact that the payment has been made to a party outside Canada for administrative purposes has led the CRA to reject the claim.
The government should either remove or modify the defined term €œcarried on in Canada€ in tax legislation to recognize the global nature of R&D and to qualify costs associated with:
- R&D outside Canada that is part of a global research project run from Canada; and
- Payments made to CROs outside Canada for work performed inside Canada.
New Fields of Science
The current Income Tax Act takes a narrow interpretation of science and specifically excludes research in such areas as social sciences and humanities. This is in stark contrast to the definition of R&D used by the OECD:
€œcreative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications€
The exclusion of the social sciences places Canada at a disadvantage in the growing fields of science of: Epidemiology, Pharmacoepidemiology, Health Economic research, Outcomes research, and Pharmacoeconomics.
The inclusion of such research has been raised before by Rx&D, the association representing Canada's Research-Based Pharmaceutical Companies, (formerly Pharmaceutical Manufacturers Association of Canada) in its August 1998 submission to the House of Commons Standing Committee on Finance on improving the SR&ED tax incentive Program. As noted in that submission:
€œExclusion of research in the social sciences and humanities as eligible expenditures under SR&ED, impedes the industry from exploiting the developing expertise at Canadian universities in drug use and health outcomes studies (pharmacoepidemiology), post marketing surveillance, and pharmacoeconomics. Key elements needed for making Canada a more attractive place for investment...€
Studies in these new areas of science meet the same three essential tests that all scientific qualifying work demonstrates: €œthe criterion of scientific or technological advancement€; €œthe criterion of scientific or technological uncertainty€; and €œthe criterion of scientific and technical content€.
Epidemiology is €œthe study of the incidence and distribution of diseases, and their control and prevention€ within a given population. Pharmacoepidemiology is the €œstudy of the utilization and effects of drugs in large numbers of people€, particularly adverse effects. Both Epidemiology and Pharmacoepidemiology studies advance our scientific knowledge by identifying factors impacting public health related to a specific disease. These studies use systematic investigation methodologies with unknown outcomes.
Health economics is the €œformal analysis of direct and indirect costs and benefits that are a consequence of a health care intervention, program or strategy€. Outcomes research is €œthe scientific study of the effects of medical care on individuals and society€ focusing on €œthe effect of therapeutic treatments on endpoints such as survival, quality of life, satisfaction with care and cost€. Pharmacoeconomics is €œconcerned with the impact of pharmaceutical products and services in individuals, health systems and society, as well as the description and analysis of the costs€. These three branches of science advance our scientific knowledge by proving or disproving a particular therapy's benefit to society. The cost effectiveness of these therapies remains unknown until such studies are performed.
All the above noted new areas of science are gaining increasing importance. Across the country, both federal and provincial regulatory and formulary authorities are demanding that such studies be completed to assist them in their decision making on approving new therapies.
The government should adopt the OECD definition of R&D for its SR&ED tax incentive purposes.
The government should prescribe the new scientific study fields of Epidemiology, Pharmacoepidemiology, Health Economic research, Outcomes research, and Pharmacoeconomics as qualifying expenditures for SR&ED investment tax credit purposes.
Refundability of R&D tax credit
As AZC aggressively tries to attract greater amounts of global R&D into Canada, one of the major impediments to attracting such R&D is the non-refundability of the SR&ED tax credit. Currently only Canadian controlled private corporations may receive a refundable investment tax credit. However, as large corporations such as AZC attract greater amounts of R&D investment into Canada, there will be a point at which the investment tax credit generated from R&D will not be recoverable against federal taxes owed. This limitation will effectively become a spending ceiling as additional R&D dollars placed in Canada will become uncompetitive and therefore will be redirected to other countries. This ceiling will frustrate the government's desire to attract greater R&D into Canada. This is an important short coming, as it has been noted earlier, it is the foreign affiliates of multinationals that perform most of the R&D in OECD member countries.
The government should extend refundability of the SR&ED investment tax credit to non-Canadian controlled private corporations.
Clinical Trial Results Meetings
One of the greatest opportunities for learning and enhancing scientific knowledge for Canadian researchers involved in clinical trials is participation in results meetings associated with clinical trials. These meetings not only provide an opportunity for researchers to review and analyze the conclusions to scientific questions upon which clinical trials were based. More importantly, the meetings allow the researchers an opportunity to rebut any conclusions that they believe are incorrect. This is important for scientific learning, as well as for such companies as AZC, in that it allows for a full vetting of the issues to ensure that the right conclusions are reached. The CRA however, routinely disallows such meetings as not advancing scientific knowledge.
The government should prescribe results meetings as qualifying expenditures for SR&ED investment tax credit purposes.
Given the improvements already implemented or under study, how could administration of the SR&ED tax incentives be further improved and their complexity reduced?
While the administration of the SR&ED program has improved over time, one area of great frustration remains with the Department of Finance's reluctance to provide information concerning the list of approved associations for third party payments purposes.
During the last two years, AZC has experienced much aggravation from two perspectives:
- Many medical specialist associations who perform research in Canada were not aware of the requirement to become an approved association, nor were they aware of the process to become approved; and
- When AZC approached the Department (through the CRA) concerning the determination of the above associations, we were accused of €œInvestment tax credit shopping€.
This demonstrates an opportunity for the Department to improve the administration of the program through:
- Enhanced communication with the stakeholders on the requirements of the program; and
- Improved understanding for the R&D work that major companies, such as AZC, perform in Canada with Medical associations.
The Department of Finance should make a renewed effort to publicize the need for medical associations that perform research to become an approved association.
The Department of Finance should publish a complete listing of approved associations for third party payment purposes.
Conclusion and Summary of Recommendations
To remain competitive in the field of R&D, Canada must adopt incentives that attract private sector R&D investment, in fields that are relevant to that sector, and on the cutting edge of new technologies and fields of science. It is only in this way that Canada will become the country of choice for R&D investment from around the world.
To this end, AstraZeneca Canada recommends:
1. The government should continue to administer and enhance its generous SR&ED tax incentives in order to maintain and increase private sector R&D investment in Canada.
2. The government should either remove or modify the defined term €œcarried on in Canada€ in tax legislation to recognize the global nature of R&D and to qualify costs associated with:
- R&D outside Canada that is part of a global research project run from Canada; and
- Payments made to CROs outside Canada for work performed inside Canada.
3. The government should adopt the OECD definition of R&D for SR&ED tax incentive purposes.
4. The government should prescribe the new scientific study fields of Epidemiology, Pharmacoepidemiology, Health Economic research, Outcomes research, and Pharmacoeconomics as qualifying expenditures for SR&ED investment tax credit purposes.
5. The government should extend refundability of the SR&ED investment tax credit to non-Canadian controlled private corporations.
6. The government should prescribe results meetings as qualifying expenditures for SR&ED investment tax credit purposes.
7. The Department of Finance should make a renewed effort to publicize the need for medical associations that perform research to become an approved association.
8. The Department of Finance should publish a complete listing of approved associations for third party payment purposes.
Once again, we thank you for this opportunity to present our views on this important program, and we grant permission to post our comments on the Department of Finance's website.
Director, Financial Planning
1. Source: Tax Incentives for Scientific Research and Experimental Development, Consultation Paper, October 2007 (Department of Finance) [Return]
2. Source: Tax Expenditures and Evaluations 2006 (Department of Finance) [Return]
3. Source: An Evaluation of the Federal tax Credit for Scientific Research and Experimental Development, Working Paper 2007-08, September 2007 (Department of Finance) [Return]
4. Source: The Federal System of Income Tax Incentives for Scientific Research and Experimental Development: Evaluation Report, December 1997 (Department of Finance) [Return]
5. Source: OECD Science, Technology and Industry Scoreboard 2007 (OECD) [Return]
6. Source: Section 37(1)(a) Income Tax Act [Return]
7. Source: Section 37(2) Income Tax Act [Return]
8. Source: Interpretation Bulletin 151R5 – Scientific Research and Experimental Development Expenditures, July 2003 (Canada Revenue Agency) [Return]
9. Source: The Federal System of Income Tax Incentives for Scientific Research and Experimental Development: Evaluation Report, December 1997 (Department of Finance) [Return]
10. Source: Section 127(9)(g), Income Tax Act [Return]
11. Source: Section 248(1) Income Tax Act. [Return]
12. Source: Frascati Manual: Proposed Standard Practice for Surveys on Research and Development, 2002 (OECD) [Return]
13. Source: Bring More Pharmaceutical R&D Investment into Canada by Improving the SR&ED Tax incentive Program, August 1998 (Pharmaceutical Manufactures Association of Canada) [Return]
14. Source: Information Circular 86-4R3 – Scientific Research and Experimental Development, May 1994 (Canada Revenue Agency) [Return]
15. Source: Canadian Oxford Dictionary [Return]
16. Source: International Society of Pharmacoepidemiology, 2007 [Return]
18. Source: Pharmacoeconomics: A Primer for the Pharmaceutical Industry, 2002 (Temple University) [Return]
19. Source: Pharmacoeconomics: A Primer for the Pharmaceutical Industry, 2002 (Temple University) [Return]
20. Source: Section 127.1(2), Income Tax Act [Return]