CIR Reform: An Analysis of Upcoming Changes
Every year, when the Finance Bill is on the agenda, calls are made to reform the Research Tax Credit (CIR). Too costly, not targeted enough, and benefiting large companies too much—criticisms abound, and attempts to reform the CIR resurface time and again. Let’s untangle the whys and wherefores, and the likely developments of this flagship program for public support of research and innovation.
Table of Contents
I. The Research Tax Credit: Between Change and Continuity
- In 1983, a new program was established to fund research.
- Making the program permanent and implementing reforms to make it more appealing
II. Why reform the CIR?
- A huge burden on public finances and mixed results
- A system undermined by windfall effects
- A program open to all research expenditures, including those for brownfield projects
III. What to Expect in 2025
- European regulations: an obstacle to certain reforms
- More than just numbers: the impact of the image conveyed
- But the need to optimize public spending
The Research Tax Credit: Between Change and Continuity
In 1983, the creation of a new program to fund research
The Research Tax Credit (CIR) was established in 1983 by that year’s Finance Act. At the time, France lagged far behind other countries in terms of public research funding. The government therefore implemented a temporary tax measure to finance increased R&D spending by industrial and commercial companies. The objective was clear: to help companies innovate and invest by creating a tax incentive that rewarded companies developing their research and development centers in France.
In practice, the government funds a portion of research expenses through a tax credit (i.e., a reduction or a refund if the company is not subject to corporate income tax) based on documentation of the expenses incurred. The original text thus provided for a tax credit equivalent to 25% of the increase in R&D expenditures.
Making the program permanent and implementing reforms to make it more appealing
Following numerous reforms designed to make the CIR more attractive and maximize its impact, the government now funds 30% of R&D expenditures up to €100 million, and applies a reduced rate of 5% for amounts above that threshold. Since the 2008 reform, which changed the calculation of eligible expenses (from the increase in expenses to the total volume of expenses), the total amount of public investment has continued to grow, reaching 7.4 billion euros in 2022.
However, France continues to lag behind the Lisbon Strategy, which called for countries to provide public support equivalent to 3% of GDP. Thus, far behind Germany (3.1%) and Japan (3.3%), France has been stagnating for several years at around 2.3%, despite having the most generous research aid program among all OECD countries.
Why reform the CIR?
A huge burden on public finances and mixed results
This cost of more than 7 billion euros to the public treasury is one of the main criticisms leveled at France’s largest tax loophole. Furthermore, CIR evaluation reports show that while, proportionally, it primarily benefits small and medium-sized enterprises (84.5% of beneficiaries in 2021), it is large companies that receive the largest share (42% of the total amount in 2021).
According to its critics, the current research tax credit—which is primarily intended to stimulate R&D within companies—is thus failing to realize its full potential. Research conducted by economists Philippe Aghion, Nicolas Chanut, and Xavier Jaravel (all three professors of economics at the London School of Economics) for the Council for Economic Analysis (2022) has shown that the CIR is twice as effective when it benefits micro, small, and medium-sized enterprises as when it benefits mid-sized and large companies.
More specifically, while €1 in public subsidies through the CIR would generate €1.40 in private investment from companies with fewer than 50 employees (known in economics as the multiplier effect), this figure drops to €1 for companies with up to 250 employees (addition effect) and even to €0.40 for large companies (substitution effect)
A system undermined by windfall effects
This criticism of the CIR’s ineffectiveness is similar to the second criticism of the CIR discussed in the figures above: the windfall effect. In the case of the research tax credit, this manifests as subsidized R&D spending that would have been incurred even without public support. According to figures published by the government, if only about twenty companies (all large firms) qualify for the reduced 5% rate on amounts exceeding €100 million, this would still represent a cost of €400 million to the public treasury.
As Philippe Aghion, Nicolas Chanut, and Xavier Jaravel point out, “It is reasonable to assume that, even without the CIR, these companies would have spent at least 100 million euros on R&D anyway.”
The same point is made in the 2021 parliamentary report by Laurent Saint-Martin, Christine Pirès-Beaune, and Francis Chouat, who argue that “these companies, whose global competitiveness depends heavily on their ability to innovate, would likely have incurred these expenses even without tax incentives.”
A program open to all research expenditures, including those for brownfield projects
Finally, critics have raised concerns that the CIR could be used to fund R&D expenditures that are harmful to the environment. Eligibility for the CIR is determined solely on the basis of research expenditures, regardless of the subject matter. For example, if a company undertakes research on the applications of a fossil fuel, it will be just as eligible for the CIR as research on renewable energy. It is for this reason that several amendments have been introduced in the 2024 Finance Bill, notably Amendment No. I-2182 by Socialist MP and allies Dominique Potier.
What can we expect in 2025?
European regulations: an obstacle to certain reforms
However, making the CIR more environmentally friendly appears difficult to implement. In the European Commission’s view, if a tax measure becomes selective (and making the CIR more environmentally friendly would constitute such selection), it becomes state aid rather than a tax measure. The research tax credit would therefore become heavily regulated and would be added to other existing mechanisms such as calls for projects, significantly limiting its scope and its effectiveness in supporting businesses. From a more practical and operational standpoint, greening the CIR would mean having to determine “what is green” and what is not, something that is impossible to establish for all sectors covered by the CIR.
More than just numbers: the impact of the image conveyed
The main obstacle to reforming the CIR would be, more than a matter of cost savings, a matter of the image projected to investors. The pro-business policy pursued since 2017 has given France a positive image among investors, making the country the most attractive for the fourth consecutive year. Reforming, even marginally, the flagship of the investment policy promoting innovation would send a very negative signal, especially since the CIR is cited as one of the main reasons for France’s attractiveness in the eyes of foreign investors.
This is the position of the Finance Committee’s general rapporteur, Renaissance MP Jean-René Cazeneuve, who believes that changing the CIR would send “a very bad signal” and have “a very negative impact on our country’s appeal to researchers.”
But the need to optimize public spending
But given the need to find €12 billion in savings in the 2025 budget, a reform of the research tax credit is worth considering. The most frequently discussed options appear to be lowering the spending cap from €100 million to €20 million, ending the doubling of the CIR for recent PhD graduates, or implementing a tiered rate based on company size. During discussions on the 2024 Finance Bill, several amendments have already sought to impact the CIR.
Whether it is the “greening” of the CIR, as illustrated by the example mentioned above, or the amendment proposed by centrist MP Charles de Courson (LIOT) aimed at creating an intermediate funding rate of 15% for amounts between €50 million and €100 million (adopted by the Finance Committee but subsequently withdrawn from the final text adopted under Article 49.3), political proposals to reform the research tax credit are very much present in the debates in the National Assembly.
Economists are recommending, at a minimum, the elimination of the reduced 5% rate for amounts exceeding €100 million in order to increase the funding rate for microbusinesses and SMEs to 35%, or, more ambitiously, to lower the spending cap from €100 million to €20 million and eliminate the reduced 5% rate, thereby increasing the subsidy rate for all beneficiaries from 30% to 42%. Ultimately, the goal is not to achieve savings at the expense of businesses, but to make the CIR more effective and efficient by minimizing windfall effects and focusing the program on sectors where its impact is greatest.
Sources:
- MESR-DGRI, The CIR in 2021 (provisional data), August 2023
- Laurent Saint-Martin, Francis Chouat, and Christine Pirès-Beaune. Information Report of the Committee on Finance, the General Economy, and Budgetary Oversight, Information Report No. 4402 – Volume 2, 15th Legislature, Submitted on July 21, 2021
- National Assembly. Meeting Minutes No. 10 – Committee on Finance, the General Economy, and Budgetary Oversight – 2023–2024 Session – 16th Legislature – National Assembly. National Assembly.
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Romain Escriva
Forecasting and Business Intelligence Analyst at Dynergie