The fiscal incentives provided by Malta for the carrying out of research and development in Malta : an in-depth evaluation

Abstract

Research and Development (R&D) in Malta is a developing area with a potential for growth. Incentives play an important role in stimulating firms to engage in more R&D activity, which in tum is said to have positive spill-over effects on the economy as a whole. The Maltese Government offers both fiscal and financial incentives to companies engaged in R&D. This dissertation takes an in-depth look at the R&D fiscal incentives available in Malta in the context of the local R&D environment, the EU regulations on R&D state aid and the R&D incentives available in other developed countries. The shortage of R&D resources in Malta such as research staff, R&D expertise and institutional setups, implies the importance of having favourable incentives in place, not only to be at par with countries offering incentives, but also to create an edge where there is none. The two main fiscal incentive schemes come in the form of an extra deduction to non-SMEs under s.14(1)(h) of the Income Tax Act and a series of tax credits for R&D project and training expenditure under Legal Notice 330 of 2005 (LN330). The generosity of these incentive schemes fare well when compared to R&D incentive schemes offered in other developed countries. However, their restrictive nature particularly in the case of LN330 tends to hinder their applicability especially with respect to SMEs. Local SMEs are particularly in need of favourable incentives in order to promote R&D activity further within this sector and to overcome the prevailing lack of R&D culture and technological entrepreneurship that exists. A series of recent changes m the area of EU state aid regulations for R&D are being considered as a base for future amendments to local incentives. These combined with a number of good practices in other countries and other recommendations can provide better incentives for certain appealing areas in the local R&D sphere, such as innovation clustering, collaboration with academia, young innovative enterprises and process and organisational innovation. These measures could yield a brighter future for R&D activity in Malta.