Australia has become a popular location for US biopharma companies to conduct R&D operations, thanks to the tax offsets available under its well-known Research and Development Tax Incentive (R&DTI) program. Less familiar to industry players is Canada’s Scientific Research and Experimental Development (SR&ED) tax credit program, which offers similar benefits a lot closer to home.
Both programs are designed to encourage development of new technologies in biotech and pharma within each country by providing incentives for experimental development, pure and applied research, and some clinical trial costs. However, there are several key differences for a US company to consider before deciding whether one, both or neither program is a good fit for its R&D operations.
The differences are not limited to the form and size of tax credits available under each program. There are also costs related to setting up shop in each country, as well as the impacts of scientific, logistical and geographical factors, that should be weighed against the benefits of the tax credit itself.
Here, we compare the basics of the Australian and Canadian tax credit programs, and then examine the “non-tax” factors that could, in many ways, make Canada an equally or more attractive option for a US company looking to reap the benefits of conducting R&D abroad.
The financial fundamentals
Australia introduced its (revised) R&DTI program – also known there as an SR&ED program – in 2011; in its current form, Canada’s SR&ED program has been in place since 1986. Each program requires the US company to establish a subsidiary in the country, and each offers the tax credit/offsets for R&D expenditures incurred internally by the subsidiary or externally by in-country CROs and CDMOs. One major difference is the form each tax credit/offset takes.
Australia’s tax offsets are fully refundable: if the credit exceeds the amount of tax owed, the company receives the difference in cash. In contrast, Canada uses a hybrid tax credit model: up to a certain level, the tax credits are fully refundable; at higher expenditures, the rates are lowered and parts of the tax credits become non-refundable. If the credit exceeds the amount of tax owed, the company does not receive the difference as a refund, but can carry the remaining credit forward for up to 20 years and use it upon reaching a taxable position.
These tax credit differences, along with the individual biotech’s or pharma’s financial situation, will be important considerations when deciding between the two programs.
Factors beyond the taxes
For a US company evaluating the Australian and Canadian programs, there is much more to consider than the tax credit itself. The demands of operating a subsidiary in each country, their differing R&D capabilities, the process of repatriating IP, and the impact of time zones and physical distance from the US can determine whether conducting R&D in Australia or Canada is financially beneficial overall.
Subsidiary operations
Establishing a subsidiary in another country obviously comes with a price tag. Beyond that, it requires executives who know the country’s business environment and are well-versed in its legal and regulatory frameworks. The US company will have to recruit legal, regulatory, and other key executives to navigate these intricacies.
The US company will also have to staff the new subsidiary; at a minimum, Australia requires an Australian Resident Director or Non-Executive Director (NED). Additional staffing could involve recruiting local talent who have the requisite knowledge and experience, as well as relocating US employees. Besides the actual costs of relocation, which are undoubtedly higher for Australia, some US employees may be reluctant or unwilling to move to Australia; Canada may be more attractive because it is closer to family and friends back in the US.
Supply chains for the subsidiary are another factor. Supplies available in the US may not necessarily be available in the other country; or, depending on their place of origin, critical supplies may cost more to ship to Australia than to Canada.
Finally, the subsidiary in Canada would own any IP it generates, and repatriating that IP to the US is not a trivial process. By contrast, Australia has a “Foreign-Owned” R&D pathway, where the (foreign) parent entity has first rights to the IP.
R&D capabilities
Canada has the capabilities for preclinical studies in large animals, whereas Australia’s capabilities are limited to rodents. This has implications for companies wishing to conduct pharmacokinetic (PK) and ADMET studies in larger animals, such as minipigs and macaques, that are more representative of humans.
As for clinical trials: the populations of Australia and Canada are roughly comparable (27 million and 40 million, respectively, in 2023), but Australia is less diverse, notably with fewer people of African descent. The diversity of Canada’s population is more similar to that of the US, meaning clinical trial recruitment in Canada could better reflect the US population that a therapy is intended to treat.
Travel and time zones
Executives and team leaders from the US company will visit the Australian or Canadian subsidiary periodically or perhaps regularly, making travel costs and travel time an important factor.
Generally speaking, travel between the US and Australia costs more, takes longer, and involves crossing the International Date Line, which can create some scheduling challenges. By contrast, travel times and costs between the continental US and Canada are comparable to travel within the US.
Time zones can also pose a challenge. The eastern and southeastern states of Australia, where most industry activity occurs, are usually 12 hours ahead of Eastern Time and 15 hours ahead of Pacific Time in North America. This upside-down workday can make it difficult to coordinate online meetings and telephone calls in real time. In Canada, most industry activity occurs in the provinces of Ontario and Quebec, which observe Eastern Time, and British Columbia, which observes Pacific Time. A US company with a Canadian subsidiary would scarcely notice the difference, especially if the subsidiary was located in the same time zone as the US headquarters.
Helping client companies tap the benefits of Canada
KreaMedica’s entire raison d’être is helping our US-based client companies navigate Canada’s R&D and business environment and enabling them to tap the benefits of the SR&ED program. We operate as the Canadian subsidiary of our client companies, which circumvents the potential headaches of the client setting up their own subsidiary here. Our expertise in all things Canadian means we can assume a great deal of the responsibility on behalf of our clients, ensuring their R&D expansion into Canada is smooth and successful.
So before you take your R&D “Down Under”, take a closer look at what “The World Next Door” has to offer. Contact KreaMedica to learn more about the benefits of conducting R&D in Canada and how we can make that happen.