The Czech Republic last year received less money from European Union funds earmarked for the support of R&D than it contributed, and recently published data confirms the unfortunate trend.
In 2005, the Czech Republic contributed 0.89 percent to the relevant budget of the European Commission, while it received only € 32.5 million (Kč 918 million), which is about 0.6 percent of the budget made available so far.
The media have speculated that Czech scientists are either less capable of competing in international grant projects than their peers or simply content with the amount of project funding that they receive from the national budget. But analysis of the data and subsequent debate has revealed that it’s the politicians and bureaucrats, and not the scientists, who are likely to be at fault.
One of the main obstacles preventing Czech researchers from gaining funding for EU-financed projects has been our own tax laws. According to the rules of the European Commission and other foreign sources of funding, value-added tax (VAT) doesn’t belong among the so-called “recognized costs” of research. Specifically, that means that if a research team pays the state VAT while carrying out a project financed from the EU, it can’t incorporate the value-added tax into its research expenses.
Of course, VAT is considered a recognized cost of research for projects financed from domestic sources. And we have thus come to the problem that the academic community has long been warning about, but which has fallen on deaf ears. If the state doesn’t refund the VAT to the scientific institutes and universities researching projects with EU funds, those institutions have to compensate for the cost of VAT from their own resources.
Following the example of several European countries, the Institute for Social and Economic Analyses has prepared an amendment to the Act on VAT that would remove the unequal conditions between domestic and European projects. The amendment, submitted by Civic Democrat (ODS) deputy Walter Bartoš, added a new paragraph to section 81 of the Act on VAT according to which VAT paid from funds from nonreturnable foreign assistance, including funds for R&D projects coming from EU sources, would be refunded to the respective research or other institutions.
The proposed provision to amend the law would additionally make it possible to claim a tax refund even for expenses of projects that were initiated before the legal amendment would take effect. Among other things, the amendment would also eliminate the discrimination of academic institutions vis a vis business entities involved in R&D, as the latter can claim VAT without a problem. Firms carrying out research can deduct VAT, because a part of their revenue is covered by taxable payments. The majority of research institutions (universities, the Academy of Sciences) don’t deduct VAT because the results of their research aren’t primarily intended to generate some kind of taxable income from licenses or the sale of publications, for example. And when it comes to taxable income, it isn’t technically possible to stake a claim on a VAT deduction.
Several solutions
The Ministry of Finance, which opposed amending the Act on VAT, argued that the proposed amendment, as submitted, wasn’t grounded in the relevant (sixth) EU directive and it was shot down by Social Democratic (ČSSD) and Communist (KSČM) members of Parliament. While unfortunate, far more important is that the directive doesn’t engage the given problem at all, leaving it instead to individual EU member states to decide how to deal with the issue of compensating for VAT.
There’s even evidence that individual EU states are solving the problem. In Finland, for example, the state compensates VAT for state universities. In Italy, projects exceeding € 250 are exempt from VAT. Germany is also trying to solve the same problem. So the bureaucracy isn’t coming from the EU; we’re creating it ourselves.
It’s possible to expect that this country will continue to receive less money than it contributes. In absolute figures it means that we will lose more than € 50 million (Kč 1.5 billion). The total refunded VAT for the entire Sixth Framework Program (funding period) would represent only one-seventh of that amount.
Current tax laws will thus continue to motivate Czech scientists to apply for projects from domestic sources more than from the EU. Directors of research institutions will warn applicants for European funds that gaining the project funding could threaten the financing of the regular operations of their institution.
In spite of this, Prime Minister Jiří Paroubek (ČSSD) recently gave a speech at the assembly of the Academy of Sciences on the importance of science and the necessity to increase funded support for R&D. It’s unclear how strong the commitment truly is; the same goes for all political parties that include support for research in their party platforms. The nearly Kč 62 million a year that goes from Czech research to the state coffers as a result of the VAT ultimately works against the interests of the academic community. It also works against the fundamental interest of the Czech Republic to increase its competitiveness through investments in research and development.
Such competitiveness today is, of course, created mainly in laboratories, in scientific institutions, in technology parks and at colleges and universities – precisely where the visible hand of the state should intervene to secure a further few million crowns in order to not to lose billions in the end. If not, the Czech Republic is destined to be an assembly line for innovations realized by scientists in other countries and politicians will continue to talk about support for science as some kind of main priority.
Simona Weidnerová is executive director of the Institute for Social and Economic Analyses.