Direct government aid and fiscal incentives for research and development each have distinctive advantages and disadvantages. An appropriate mix adjusted to prevailing conditions may increase the efficiency of the system of government aid. As a matter of fact, the majority of OECD countries provides support to R&D both through direct subsidies and, increasingly, by means of tax incentives. At present the EU is paying greater attention to fiscal incentives for R&D than in the past. For a considerable period of time, Austria has been offering an instrument of fiscal aid to R&D – the R&D tax allowance – which is rather generous by international standards. In its present form, however, the R&D tax allowance shows some weak points. A reform of fiscal aid for R&D, presently in the stage of a draft amendment of the income tax law, is designed to eliminate some of these weaknesses by additional measures (a new R&D tax allowance for R&D expenditure based on the OECD definition, an R&D premium for firms that do not manage to make sufficient profit). This reform of tax incentives for R&D does not leave any firm worse off than before. On the other hand, however, it means that the set of instruments is becoming increasingly complex, and that in turn the costs of administration and compliance by firms tend to increase. Moreover, for the purpose of marketing Austria as a good business location, an easily understandable design of tax incentives would be preferable. Up to now the actual use and effects of the R&D tax allowance have not been very transparent and no evaluation has been presented so far. Therefore, it is recommended to increase the transparency of fiscal aid for R&D and to evaluate the newly designed set of instruments according to international standards after they have been in use for three years.
