Are you aware that you are entitled to an additional deduction for your R&D expenses?
Pursuant to Law No. 5746 on Supporting Research, Development and Design Activities, all R&D and innovation expenditures incurred by companies in R&D centers and all design expenditures incurred exclusively in design centers can be deducted from taxable corporate income.
This is an important advantage for companies engaged in R&D and design activities.
On the one hand, R&D and design expenditures are taken into account in the determination of the company's profit as direct expenses or capitalized and depreciated expenses, on the other hand, they can be deducted once again from the profit generated, and the non-deductible part is transferred to be deducted in the following periods.
The transferred amounts are taken into account in the following years by increasing the revaluation rate determined annually according to the Tax Procedure Law.
However, the relief provided is not limited to these. Pursuant to the Law, up to fifty percent of the increase in R&D and innovation expenditures made that year compared to the previous year in R&D centers that meet the criteria determined by the President;
In design centers that meet the criteria determined by the President, up to fifty percent of the increase in design expenditures made in that year compared to the previous year can be deducted within the principles to which normal deductions are subject.
The additional deduction amount that cannot be deducted due to insufficient earnings can be transferred to the following years, and in case of transfer, it can be taken into account by increasing the revaluation rate.
According to the 2022 tax expenditures report of the Revenue Administration, the amount of R&D deductions utilized by companies for 2021 is estimated to be 5 billion TL, and this amount is estimated to reach 8.5 billion for 2022 and 10.2 billion TL for 2023.
In the same report, design allowance amounts are estimated as 225 million TL for 2021, 389 million TL for 2022 and 470 million TL for 2023.
Conditions to benefit from the additional discount
The Presidential Decree on the subject stipulates that in R&D or design centers established within the scope of Law No. 5746 and which have achieved at least a twenty percent increase in any of the following indicators compared to the previous year, fifty percent of the increase in R&D and innovation or design expenditures made in that year compared to the previous year can be deducted from the income subject to corporate tax. This additional deduction will be valid until December 31, 2028.
The indicators that must increase by at least 20% compared to the previous year in order to benefit from the additional deduction are as follows:
- a) Share of R&D or design expenditure in total turnover
- b) Number of national or international patents registered
- c) Number of internationally supported projects
- d) Ratio of the number of researchers with postgraduate degrees in R&D Centers to the total number of R&D personnel
- e) Ratio of the number of designers with postgraduate degrees in Design Centers to the total number of design personnel
- f) Ratio of the total number of researchers in R&D Centers to the total number of R&D personnel
- g) Ratio of total number of designers to total number of design personnel in Design Centers
- h) Ratio of turnover generated from new products resulting from R&D or design activities to total turnover.
The Law defines R&D personnel as researchers and technicians directly involved in R&D activities, and design personnel as designers and technicians directly involved in design activities.
The Law also defines researchers as experts with at least a bachelor's degree who are involved in the design or creation of new knowledge, products, processes, methods and systems and the management of related projects in R&D activities and projects within the scope of the definition of innovation, and designers as persons with at least a bachelor's degree from engineering, architecture or design-related departments of universities and other persons with at least a postgraduate degree in any of the design fields who are involved in the realization of projects within the scope of design activities and the management of related projects.
The law defines technicians as graduates of design, technical, science or health departments of vocational high schools or vocational colleges, who have technical knowledge and experience.
According to data from the Ministry of Science, Industry and Technology, the number of R&D centers in operation as of May 2023 is 1,274. The total number of personnel, including support staff, in these centers is 79,163, and the total number of R&D personnel with a bachelor's degree or higher is 63,554. Of these, 47,664 have bachelor's degrees, 14,529 have master's degrees and 1,361 have doctoral degrees. Accordingly, the ratio of the number of researchers to the total number of personnel, including support personnel, is 80%, while the ratio of R&D personnel with master's degree and above to the total number of personnel, including support personnel, is 18.3%. The number of personnel working as technicians in these centers is not available from the Ministry data.
The number of patents registered in these centers as of May 2023 is 11,932.
According to the data of the same Ministry, the number of design centers in operation as of May 2023 is 326. The total number of personnel, including support staff, in these centers is 7,861, and the number of design personnel with a bachelor's degree or higher is 5,762. Of these, 5,016 have bachelor's degrees, 715 have master's degrees and 31 have doctorate degrees. Accordingly, the ratio of design personnel with a bachelor's degree or higher to the total number of personnel including support staff is 73.29%, while the ratio of personnel with a master's degree or higher to the total number of personnel including support staff is 9.4%. The number of personnel working as technicians in these centers is not available from the Ministry's data.
The number of patents registered in these centers as of May 2023 is 229.
Evaluation and conclusion
According to the results of the TURKSTAT 2021 Research and Development Activities Survey, 49% of R&D expenditures consist of personnel expenditures, 43% of other current expenditures and 8% of investment expenditures.
Assuming that this structure is also valid for R&D centers, it may be possible to convert inflation-induced increases in both personnel and other expenditures into tax deductions by increasing the employment of researchers and designers with master's degrees or doctorates in R&D and design centers in order to benefit from additional R&D deductions.
For example, a company that has never employed a researcher or designer with a master's degree may be able to obtain an additional deduction by employing a new person with a master's degree. The tax advantage of the additional deduction may be higher than the cost incurred.
An increase in employment may not create a net tax advantage for all companies. Therefore, companies that do not benefit from the additional R&D deduction will need to calculate the size of the advantage and the size of the additional cost they will incur if they increase employment in a way that fulfills the conditions and make a decision accordingly.
(This article was published in the July 2023 issue of ICT Media)