\u201cThe fact is that few companies allocated funding to projects involving technological risk, even when receiving tax incentives. Instead of increasing their R&D investment, many firms used the tax breaks for incremental research with low levels of innovation,\u201d says Rocha. \u201cAnother problem is that tax incentives are largely being used by companies to fund activities more related to the D for development than to the R for research,\u201d he says. This strays from the purpose of the tax exemptions, which is for companies to boost investment in more cutting-edge research as well.<\/p>\n
The authors of the study believe the Lei do Bem (a set of tax incentives for R&D to boost innovation) is an exception. \u201cIt works well because it operates horizontally, rather than vertically like other incentives do,\u201d says Rauen. Lei do Bem incentives can be used by companies across different industries and can support the development of crosscutting technologies, like computer vision systems, which require knowledge in diverse fields, ranging from software engineering to medicine (see<\/em> Pesquisa FAPESP issue no. 266<\/em><\/a>). Conversely, vertical policies such as the Lei de Inform\u00e1tica and Inovar Auto provide incentives only to specific industries, in these two cases the Information and Communications Technology (ICT) and automotive industries, respectively. According to Andr\u00e9 Rauen, the horizontal model has been used by many countries to drive disruptive innovation by fostering collaboration among firms and research groups in areas such as artificial intelligence and the Internet of Things.<\/p>\n Economist Carlos Am\u00e9rico Pacheco, a professor at the University of Campinas (UNICAMP), notes that the Lei de Inform\u00e1tica, although requiring offsets from companies, was created more as an ad hoc tax policy for the Manaus Free Trade Zone than as an R&D incentive instrument proper. The tax incentives that have proven most effective, those under the Lei do Bem, are still underutilized. \u201cThe level of support available for private R&D in Brazil may seem fairly reasonable compared with other countries if tax incentives under the Lei de Inform\u00e1tica and Inovar Auto are factored in. But it is very little, as a percentage of GDP, if you consider only the support that really matters, which is the Lei do Bem,\u201d says Pacheco, who presides the Technical-Administrative Council (CTA) at FAPESP.<\/p>\n The Lei do Bem was created in 2005 to simplify the utilization of tax incentives. It allows companies to deduct 20.4% to 27.2% from their income tax and social security tax (CSLL) for investment in R&D and technological innovation. According to data from the Brazilian Ministry of Science, Technology, Innovation, and Communications (MCTIC), the number of incentive awardees grew from 130 in 2006 to 977 in 2013. The amount of tax incentives awarded has also increased, rising from R$227 million in 2006 to R$1.8 billion in 2015. A survey by the National Association for Research and Development of Innovative Companies (ANPEI) estimates that the Lei do Bem has supported the creation of more than 15 R&D centers to date. But an IPEA report published in 2017 showed that part of the increase in tax incentives had done no better than to replace private spending with public spending.<\/p>\n Another problem revealed in IPEA\u2019s 2018 study is that tax exemption programs are not periodically assessed to provide a more accurate picture of the level of impact. The biggest roadblock is the difficulty in obtaining detailed data on these policies. \u201cThe lack of complete information means assessments are poorly substantiated, which prevents weaknesses from being identified and improvements proposed,\u201d says economist Solange Maria Corder, a professor in the Department of Science and Technology Policy at the University of Campinas (DPCT-UNICAMP). The tax exemption amounts each company has been awarded, for example, are protected by fiscal confidentiality. Not even IPEA has access to this level of information.<\/p>\n Indirect data from the Brazilian Institute of Geography and Statistics\u2019 (IBGE) Innovation Survey (PINTEC) shows that despite an increase in tax incentive awards through Inovar Auto, domestic R&D investment in the automotive industry declined from 1.28% of companies\u2019 net revenue in 2011 to 1.1% in 2014. \u201cNot only has it failed to drive technological innovation in the industry, but Inovar Auto has since been replaced by a new initiative without first being adequately assessed,\u201d says Glauter Rocha. The program expired in December 2017 and was replaced in October this year by Rota 2030, with tax breaks expected to exceed R$2 billion in 2019. In 2017, tax exemptions under Inovar Auto were a total of R$1.2 billion, according to data from the Federal Revenue Service. The program awarded excise tax (IPI) credits (discounts on taxes payable) of as much as 30% to companies in the auto industry. For example, Inovar Auto offered an IPI reduction of 1% if automakers could produce vehicles burning 15.46% less fuel, and 2% for companies achieving fuel savings of 18.84%.<\/p>\n In 2016 the Federal Audit Court (TCU) initiated an investigation into the program and found there was little assurance that automakers would meet their R&D offset commitments. \u201cMany automakers had their accounting and financial departments find ways to lawfully use the tax incentives without necessarily raising their R&D spend. Many activities that are not strictly R&D are reported as R&D, says S\u00e9rgio Salles-Filho, a coordinator at UNICAMP\u2019s Laboratory for Studies on the Organization of Research & Innovation (GEOPI). A case in point, explains Glauter Rocha of IPEA, is tropicalization, or the adaption of foreign-designed vehicle models to the local market, which requires minimal innovation effort. Within the Inovar Auto program, automakers were expected to invest in engineering, basic industrial technology, R&D, and developing supplier capabilities in exchange for tax benefits. But instead, technologies were almost entirely brought from parent companies overseas and adapted to vehicles manufactured in Brazil (see<\/em> Pesquisa FAPESP issue no. 267<\/em><\/a>).<\/p>\n![](\"\/wp-content\/uploads\/2019\/06\/274_IPEA_02-desktop.png\")
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