Contract Researchers Vie for Slice of R&D Tax Credit

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By Marc Heller

Aug. 28 — For all the talk of making the federal tax credit for research and experimentation a permanent fixture in the tax code, a handful of research companies want something more basic: to qualify for the credit in the first place.

Companies that conduct research on a contract basis can't take the credit, and the companies that hire them can take only 65 percent of it—leaving 35 percent of the tax credit in those cases in the hands of the government.

Lobbyists for contract researchers are pushing Congress to change the law so that contractors can take the leftover 35 percent credit. Their success in doing so may hinge on a pending extension of the research credit, along with other so-called tax extenders that expired at the end of 2014—the only major tax-related bill that seems certain to pass Congress in 2015.

“That 35 percent is just kind of lost,” said John J. Lewis, senior vice president for policy and public affairs at the Association of Clinical Research Organizations, a group representing such contract medical research companies as Covance Inc. and Parexel International Corp.

The chatter from the industry is likely to increase. Research and development in the pharmaceutical business is growing, even as big drug companies shut down their own research facilities around the world, EY Global said in an April report written by Elizabeth Pringle, executive director of EY LLP's National Quantitative Services.

Growth for CROs 

According to EvaluatePharma, research spending in the global industry will grow from $137 billion in 2013 to $162 billion in 2020, EY said. The contract research organization business will grow as well, from $26 billion in 2013 to $36.6 billion in 2018, EvaluatePharma said in a June 2014 preview and outlook report.

Several countries allow contract researchers to claim part or all of research tax credits, including the U.K., France and Canada. “Our members operate globally, so they're familiar with these credits,” Lewis said.

Pharmaceutical companies aren't the only types that could benefit. Life sciences generally, as well as any industry that requires highly specialized and technical services, are candidates, said Shelby S. Ford, senior manager of Crowe Horwath LLP's National Tax Office.

“Taxpayers in constantly changing and cutting-edge industries such as software development or highly regulated industries such as life sciences or utility companies generally spend a significant amount of resources to contract with third parties,” Ford told Bloomberg BNA Aug. 28.

Keeping It at Home 

The multinational nature of the research may complicate the issue. U.S. lawmakers frown on rewarding research that U.S. multinationals choose to do in other countries—a sentiment reflected in the limits Congress is sure to place on any tax breaks it offers for patents and other intellectual property, for instance. In some cases, companies contract out research that is done partially in the U.S. and partially in foreign countries.

That type of arrangement makes determining eligibility for tax credits more challenging, EY said.

Bill in Play 

Sens. Thomas R. Carper (D-Del.) and Patrick J. Toomey (R-Pa.) have taken up the contractors' cause, proposing eligibility for contract research as part of a broader measure called the COMPETE Act (S. 537) expanding the tax credit. The lawmakers filed it as an amendment to the two-year tax extenders bill the Senate Finance Committee passed in July, but their amendment, like most that day, wasn't considered.

The “big question,” Lewis said, is whether lawmakers are willing to take up the proposal now or prefer to wait until broader tax changes are on the agenda in 2016 or 2017. The contractors have allies on the House Ways and Means Committee as well, including Rep. Patrick Meehan (R-Pa.), who introduced similar legislation called the PARTNER Act (H.R. 2179).

“If they open it to modification, there's a fair chance of it being included,” Lewis said.

Lawmakers are still working on ways to provide the 35 percent credit with the least cost to the government, Lewis said. Any expansion wouldn't be retroactive, he said.

To contact the reporter on this story: Marc Heller in Washington at mheller@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com

Text of the EY report is at http://www.ey.com/GL/en/Industries/Life-Sciences/EY-pharmaceutical-r-d-tax-incentives.

Text of the EvaluatePharma report is at http://info.evaluategroup.com/rs/evaluatepharmaltd/images/EP240614.pdf.