Study Finds Oilfield Service Companies Need Tax Credits
Oilfield services (OFS) firms need to take advantage of research and development (R&D) tax credits to accelerate innovation and stay competitive amid the energy transition, a new report from business performance consultancy Ayming US finds.
The firm’s “The Benchmark” report compares R&D tax incentive schemes worldwide based on program generosity and ease of application. By those metrics the United States’ R&D tax credit system represents “an extremely optimistic environment” for OFS companies, Ayming found.
“The Research and Development Tax Credit is a government-sponsored tax incentive that rewards companies for conducting R&D in the United States,” Ayming President Hervé Amar told Rigzone. A company can use the credit to offset the amount of tax they owe in a given year.”
In his recent conversation with Rigzone, Amar elaborated on how OFS players can gain the competitive edge with U.S. R&D tax incentives. Read on for his perspective.
Rigzone: Why are R&D tax credits needed? Shouldn’t private-sector innovation occur without what some might view as subsidies?
Amar: The credit was implemented to incentivize innovation throughout the economy and to keep technical jobs here in the U.S. For a new start-up business, the payroll tax credit (part of the R&D credit) is crucial to help them grow even when they are not paying “taxes” on income, allowing them to hire developers, researchers, etc. to build their business before they “go to market.” Investment in research and development activity doesn’t immediately generate revenue so it can be delayed or cancelled when companies are looking at their yearly earnings. The tax credit is a crucial incentive that helps businesses build for the future and maintain a profitable operating business.
Rigzone: Given the energy transition, where are OFS companies falling behind – and thus need to accelerate innovation?
Amar: The external market conditions for OFS have been extremely challenging since the significant oil price drop of 2014. The modest recovery in price has not translated to OFS and they are still under pressure to deliver innovative and cost-effective solutions to the market. R&D credits can help offset innovation and therefore decrease the cost burden of innovation, remaining competitive now and in the future.
Rigzone: Through your study, what did you observe in terms of desirable and undesirable R&D tax credit characteristics?
Amar: R&D tax credits are always desirable. They provide incentive for innovation, support for start-ups and offset the risks of activity that do not immediately provide return. The only undesirable characteristics may be the difficulty in applying for the credits or the range of qualifying activities. However, in our study of 15 countries any difficult applications were offset by the generosity of the credit, and specialist companies such as Ayming are dedicated to helping businesses identify qualifying activities and securing the credit.
Rigzone: Your firm pointed out that product development should “be seen as evolution, not revolution.” One might interpret this as meaning R&D in the OFS sector too often focuses on finding the “next big thing” rather than making more gradual improvements to product lines. How might OFS companies adopt a more broadly focused approach to R&D, and what do you see as the major payoffs from such a shift?
Amar: Understanding that evolution is applicable allows R&D to become an everyday practice for businesses. Although significant “revolutionary” research and development projects will always be important, they are time-consuming and costly, which can limit a company’s enthusiasm and desire to plan. Understanding the evolutionary approach means that R&D becomes a routine element of a business’ operation.
Rigzone: What was the most surprising finding from your study?
Amar: Two key areas. The first is that each country will support claims from foreign-owned businesses as long as the activity is within that country. The second is that in all countries additional R&D tax incentives are available. In the U.S. this refers to additional state incentives. Over 30 states currently offer credits over and above the credits offered by the Federal Government.
Rigzone: Would you like to add any comments?
Amar: The common misconception of what activities qualify is that they are based around laboratories or specialized test facilities. This is not the case. The range of qualified activities is exceptionally broad in the U.S. and every company needs to properly investigate their activities. The cashback credit can make a significant different to any size business regardless of their market or profitability.
The study is available on Ayming’s website.
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