whereby the government
, hoping to encourage growth in a particular area
, provides a mechanism whereby companies involved in the area
have to pay less tax
For example, in Australia, the government wanted to encourage research and development. To do so, it allowed companies involved in R & D to claim tax credits for 150 per cent of their R & D expenditure (instead of 100 per cent -- R & D is considered an expense and hence, it is deducted from revenues before the amount of tax finally due is calculated). Given that the company tax rate was 39 per cent at the time, this encouraged companies to invest more in R & D. If revenues for one company were $10 million, and the company had expenses of $9 million, including $2 million of R & D for instance, then instead of paying $390,000 in tax without the incentive (on the $1 million profit), they would pay no tax at all (because the $2 million R & D is treated as if it was really $3 million, so the company for the purposes of taxation has $10 million revenue and $10 million expenses). Effectively, the company got a $390,000 saving because of the government's tax incentive.