‘Devil in detail’ of R&D tax
Incentive scheme must be right, say firms
Proposed plans for a research and development tax incentive are being welcomed by New Zealand business — if it can be properly designed. The Government has proposed phasing out the Growth Grant administered by Callaghan Innovation and introducing a 12.5 per cent research and development (R&D) tax incentive in a discussion document released today.
EY New Zealand tax policy leader David Snell said this would be the most significant law reform on business taxation for many years, but “the devil is in the detail — and design”.
“The Government’s taking on a big challenge,” Snell said. “R&D tax incentives when they work well contribute greatly to an innovation ecosystem.
“But many countries have tried to deliver smart R&D incentives, with great intentions, only to fall into a cycle of constant tinkering and reform. Either the credit isn’t targeted well and businesses claim too much, or it’s so tight that it achieves little.”
Snell said having a welladministered system was also important, saying overseas experience had shown robust but fair enforcement was essential.
According to Research, Science and Innovation Minister Megan Woods, New Zealand’s gross expenditure on research and development is 1.28 per cent of gross domestic pro-
Government’s taking on a big challenge. David Snell, EY New Zealand tax policy leader
duct, compared to an OECD average of 2.38 per cent.
While business expenditure on R&D has been rising it is still only 0.6 per cent of GDP, she said.
The Government is committed to increasing R&D expenditure to 2 per cent of GDP over 10 years and the R&D tax incentive was one tool to get there.
The move has also been welcomed by organisations i ncluding ManufacturingNZ and BusinessNZ, whose chief executive Kirk Hope said the move would likely raise R&D investment overall.
“The proposed tax credit system is focused mainly on helping larger companies, while smaller companies would continue to utilise the project grants system under Callaghan Innovation — the consultation may help determine whether these are the best ways of supporting large and small companies respectively.”
Not all were so positive. National Party spokeswoman for research, science and innovation Parmjeet Parmar saying the plan represented a decrease in support for R&D.
Parmar said the proposed plans to cancel Callaghan growth grants would negatively impact hundreds of the country’s most innovative technologyfocused companies.
“All of those companies will drop from getting 20 per cent of their research and development expenditure refunded down to 12.5 per cent,” Parmar said. “And start-ups making a loss may have to wait until they are making a profit to cash in any tax credit, that could take years compared to the current system which provides grant funding immediately. How is this supposed to grow R&D.”
Such tax schemes were also ripe for abuse, Parmar said, adding that similar introductions often led to ordinary expenditure being “reclassified”.
Andy Hamilton, chief executive of The Icehouse said although it was a good move, there needed to be careful consultation to ensure a range of options for different-sized businesses.
“I think everyone would be on board with raising private-sector spend on R&D but the question is how do you achieve that, and, is one instrument like R&D tax credits enough because not all businesses are the same?” Hamilton said.