What do we know about the effectiveness of fiscal incentives for research and development in Brazil’s ‘Law of Good’?

Studies help assess and differentiate incentives for private investment in research and development

Fernanda De Negri

Fiscal incentives are widely adopted in many countries to promote corporate investments in research and development (R&D). According to the Organisation for Economic Co-operation and Development (OECD),1 over 46 countries adopt these policies, including Brazil, Canada, Chile, China, almost all members of the EU, Korea, Mexico, Russia, the US, the UK, and New Zealand.

Bloom, Van Reenen and Williams (2019) synthesised the available empirical evidence regarding the efficacy of various types of policies in support of R&D. According to them, there are many high-quality studies in the literature that deal with fiscal incentives. In addition, the evidence in these studies demonstrates that fiscal incentives have a positive impact on innovative capacity.

In Brazil, fiscal incentives for R&D were instituted by Law No. 11.196, enacted in 2005—also known as the ‘Law of Good’ (Lei do Bem). Chapter III of this law created a series of tax reduction mechanisms for Brazilian companies to invest in R&D, both directly and through the acquisition of R&D from other institutions or facilities. The main mechanism consists in the possibility of deducting from the tax base all investments made in R&D activities that are classified as operational expenses.

This Policy Research Brief presents a review of studies carried out in Brazil regarding the effectiveness of these incentives— are they working?

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