[Pharm-policy] Answers to 2 questions regarding IRS and PhRMA data

[James Love]

The following are responses to 2 questions regarding yesterday's note
that looked at IRS and PhRMA data on R&D expenditures.  

1.  I had a question from someone who asked about the 81.6 percent
number I used for the share of R&D that is from the US.  This was taken
from the PhRMA annual R&D survey.  The numbers from the PhRMA survey are
given below:

   Levels of R&D, according to PhRMA Survey
   (this is based upon responses to the PhRMA
    survey, in millions).

                US           non-US     Total   
                        
  2000          22,479.0     3,968.4    26,447.4
  1999          20,111.8     3,919.9    24,031.7        
  1998          17,222.5     3,839.0    21,061.5        
  1997          15,516.6     3,492.1    19,008.7        

            shares, in percent
  
                US           non-US     Total   
                                        
  2000          85.0 %       15.0  %    100 %
  1999          83.7 %       16.3  %    100 %
  1998          81.8 %       18.2  %    100 %
  1997          81.6 %       18.4  %    100 %

Note, this indicates the share of R&D done in the US, by the companies
that respond to the PhRMA survey.  R&D by an Indian or Brazil firm that
was not responding to the PhRMA survey would not be included.  PhRMA
membership includes quite a few non-US firms,  such as Glaxo Wellcome,
SKB, Hoechst Marion Roussel, 
Novartis and Rhone-Poulenc Rorer, to mention a few.  


2.  Second, I was asked about the differences in the PhRMA and the IRS
definitions for R&D.  One difference is that the IRS only allows 65 to
75 percent of research expenses that are contracted out.  I have
corrected for this in my previous note (the IRS breaks down the claimed
R&D expenditures by category, including contract research, so this is
fairly straightforward).  The other limitations in the IRS definition
are spelled out in the IRS instructions for its form 6765 (the form the
companies fill out out to get the increasing R&D tax credit).  


        - 1999
Department of the Treasury

Internal Revenue Service
Instructions for Form 6765

Credit for Increasing Research Activities


Qualified Research

The research credit is generally allowed for qualified research.
Qualified research means research for which
expenditures may be treated as section 174 expenses.  This research must
be undertaken for discovering
information that is technological in nature, and its application must be
intended for use in developing a new
or improved business component of the taxpayer. In addition,
substantially all of the activities of the research must be elements of
a process of experimentation relating to a new or improved function,
performance, reliability, or quality.

The research credit is generally *not* allowed for the following types
of activities:

* Research conducted after the beginning of commercial production.

*
 Research adapting an existing product or process to a particular
customer's need.

*
 Duplication of an existing product or process.

*
 Surveys or studies.


*  Research relating to certain internal-use computer software.

* 
 Research conducted outside the United States (outside the United
States, Puerto Rico, or a U.S. possession, for amounts paid or incurred
after June 30, 1999).


* Research in the social sciences, arts, or humanities.

*
 Research funded by another person (or governmental entity).

If you incur qualified clinical testing expenses relating to drugs for
certain rare diseases, you may elect to claim the orphan drug credit on
these expenses instead of taking the research credit. See Form
8820,Orphan Drug Credit. 


=======================================================
James Love, Director           | http://www.cptech.org
Consumer Project on Technology | mailto:love@cptech.org 
P.O. Box 19367                 | voice: 1.202.387.8030
Washington, DC 20036           | fax:   1.202.234.5176
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