The Domestic Research Enhancement Act of 2017 (H.R. 1234) aims to amend the Internal Revenue Code of 1986.
The legislation “makes contract research providers eligible to receive [an R&D tax] credit and allows them to claim the 35% of eligible expenses currently abandoned when research is contracted out,” John J. Lewis, Senior Vice President, Policy & Public Affairs, at the Association of Clinical Research Organizations (ACRO) told us.
However, it does not allow for double counting and does not change any qualifying research definitions. It also does not take away credits from companies currently claiming them.
“About 45% of clinical trials currently take place in the US,” explained Lewis. “We believe this legislation would ensure the US remains the preeminent location for clinical trials and innovation remains within US borders.”
Same work, different credit
Currently, if a pharma company does its R&D in-house it may claim a tax credit for 100% of its eligible expenses – though actual credit calculations are more complicated. However, if the pharma company contracts out its research it can only claim 65% of eligible expenses. So, 35% “disappears,” as contract research is currently unable to claim any credit.
In many other countries CROs may claim a portion, or in some cases, 100% of the credit as the “entity employing the people conducting the research,” Lewis explained, commenting that the US model rewards the intellectual property holder (sponsor), not necessarily the employer.
“So, currently, CROs have a perverse incentive to conduct clinical trials outside the US,” he added.
Additionally, Lewis described the scenario in which a CRO purchases a facility from a pharma company: “In effect, when the pharma company owned the lab, the research going on there qualified for the R&D credit. But the next day when the owner is a CRO, and now conducting research on behalf of many sponsors, the CRO gets none of the R&D credit,” he said. “Same work, same facility, same employees.”
Moving forward, Lewis said ACRO is working to have similar legislation introduced in the Senate. “The House is expected to complete a broad tax reform bill by the August recess and we believe this provision has a strong chance of being included as Congress looks to modernize the R&D credit,” he said.