Taxation (Research and Development Tax Credits) Bill

Mr Assistant Speaker, thank you very much for this opportunity. Look, the National Party is not supportive of this bill that’s come to the House, the Taxation (Research and Development Tax Credits) Bill. Obviously, most parties across the Parliament are supportive of some measure of support for research and development in the New Zealand economy. We have a massive contribution, in terms of public science through universities and Crown Research institutes and many other areas. Previously, the National Government made a very significant contribution to business research and development through the Callaghan Innovation grants system.

There’s a long and searing debate that can be had on the merits of tax credits versus a grants system. The primary advantage of a grants system is that a country can know how much it’s going to spend, and budget for it, and then, in an open and transparent way, figure out how that is going to be spent. With an R & D tax credit, it’s much harder to figure out how much it’s going to cost over time. It’s great for accountants but it’s not good for start-up companies. In particular, if you’re not making profits for 10 years and you’re needing cash now in order to grow your business, then you’re going to much prefer a grant system more than you are a tax rebate system, if you’re nowhere near profit.

So that has been the very strong feedback from most of the businesses in the start-up sphere; they’re concerned about this proposal. Now, there’s loose talk about some kind of way of dealing with that problem for start-up companies, but we haven’t seen anything substantial yet from Government. What we have seen is talk of introducing a capital gains tax that would be even more difficult for that important group of innovators in this economy. So on that basis, we are not convinced this is a sensible piece of legislation, and I think that sort of summarises our thoughts quite clearly. Thank you very much.

I’m very happy to rise to give a brief contribution in support of the further passage of the Taxation (Research and Development Tax Credits) Bill. This is a really important bill. One of the challenges that New Zealand has faced over the last 40 years has been the challenge of declining relative productivity. That is, for each hour that our citizens work when they give their labour, or every dollar of capital that we invest, we get relatively less back than many other countries do. That is a productivity gap that has opened up over the last 40 years. Ultimately, it is productivity that drives our ability to generate the national wealth that we need to ensure the well-being of New Zealanders.

So if you want to look at the long-run economic challenges that New Zealand faces, this is one of the biggest ones, because what we’ve been doing in this country is taking the low road in terms of growth, quite often—low wage economy, relying on immigration and population growth, shifting towards a service-based economy, and not actually putting the investment into plant machinery, R & D, and all those things that the most successful economies over the last 40, 50 years have put the investment into.

This bill addresses one of those gaping holes, which is R & D. New Zealand, as it stands, has one of the lowest private sector rates of research and development in the OECD. In terms of public sector investment, we’re kind of roughly mid-range, bottom of mid-range. In terms of private sector investment, we are one of the lowest. One of the ways that we can seek to address this is by directly saying to businesses that “Within your operations, we will recognise your investment in research and development”. This, I think, goes to one of the critical points that the previous speaker, the Hon Paul Goldsmith, raised, one of the critical points of debate in respect of the bill—it’s how do you go about doing that? Mr Goldsmith has put up the argument for a grants system. He’s right in one respect: I guess if you say we’re going to give out $50 million in grants this year—or whatever the figure is—then you know what the figure is.

Well, that’s not really an argument for a system that will enhance research and development in the country; that’s an argument for knowing how much you’re going to spend on it. What the research and development tax credit does, and this happens in many, many other jurisdictions, is it actually says, “We’ll recognise the R & D that you do. You don’t have to jump through hoops. You don’t have to go through a process. You’re not reliant on the particular political mood of the day in terms of what’s a good thing to be funding and supporting.” Actually, in terms of a market mechanism to recognise the research and development contribution of companies to our economy, a research and development tax credit is where it is at, and it is somewhat surprising in that respect that our Opposition, on that side of the House, who consistently tell this side of the House that we don’t understand how markets work, want to intervene and pick winners through a grants-based process.

I would argue that this system is not only more equitable, which means that any company that is carrying out R & D and that qualifies gets it, rather than a grants system whereby someone gets it only if they apply and if they happen to be the one that is granted it out of that limited pool. So I think this is a far more effective way of ensuring that we incentivise R & D. And, as I say, that’s going to be a long-run driver of productivity and the generation of wealth and good jobs for people in New Zealand.

The select committee had a full process for this bill. We heard, I think, about 32 submitters and had a lot of dialogue with officials. I want to thank and acknowledge officials for their support on this bill. As a result of that dialogue on the select committee, there are a number of changes to the bill which, I think, has taken a bill that had a good concept sitting in behind it and has made sure that it will be as effective as possible.

One of the areas that we have made a change in is recognising that sometimes, particularly with start-up companies, there are changes in what are called controlling rights. That’s how start-up companies often get the capital that they need to push themselves along. Yet in its original form, the bill would have meant that if there was a change in controlling rights of more than 49 percent, you would have potentially lost the access to the tax credit. We’ve rectified that issue here, so that’s going to be a real boon to those small start-up companies going through changes in ownership who might still benefit from this.

We’ve made a change in respect of what’s called the contractor’s margin. In the bill as it originally came to the committee, if the R & D was done by an outside contractor, then only 80 percent of the value of the tax credit would have been applied. That was, effectively, saying, “Well, there’s a profit margin and we don’t want to be providing the tax credit to that.” The point that was well made in submissions is that actually there are some companies for whom the only viable option is to get R & D support externally, and we shouldn’t be playing favourites there. So we’ve got rid of that provision in the tax credit—100 percent will apply in either of those situations.

This is a good bill. It’ll enhance New Zealand’s productivity, it will enhance our national wealth, it will deliver good jobs for our people, and I commend it to the House. Thank you.

Thank you for the opportunity to speak about this bill. Now, we did support this bill at the first reading because, obviously, we want to be open to ideas that are going to enhance New Zealand’s productivity, especially in the space of R & D. But we have come to the conclusion that our support will not go ahead for this bill because we do see some flaws in it.

I know the previous speaker, Michael Wood, referred to trying to work out different ratios of support to different types of companies, but particularly for those who are in pre-profit situations that are still investing quite heavily in their R & D—and I’m talking about millions of dollars—that don’t have a strong profitable income that they can claim a tax credit for. Such a company exists in New Plymouth, and I’ve met a number of them who have literally spent millions of dollars in developing their technology and, in fact, have received overseas support from the United States Department of Energy. But that support is going to be matched dollar for dollar. So a tax credit doesn’t really work for them because they do need substantial grant funding. Now, they could go to market, they could sell equity, but then they would lose their intellectual property. They would lose the opportunity for the workforce and the technologists and the engineers in my electorate to be able to take benefit from this.

Another aspect, I think, that we feel is perhaps being lost in the debate is, in fact, that R & D investment was, and has been, increasing in New Zealand for some time. Now, I know the Government’s intention and aim is to get up to 2 percent of GDP within the next 10 years from a current level of around about 1.25 percent. I was interested to read Business New Zealand’s submission, where they stated that in order to get to that point of 2 percent of GDP in 10 years’ time, the increase of investment in R & D needs to be around about 8.3 percent per annum. What they noted was that between the years 2016 and 2018—that year between, obviously, 2017—the increase in investment at that particular point in time was around about 17 percent. So what they alluded to was the fact that the grants system was working. It was bringing a positive input into investment in R & D.

And, yes, the Government would believe that an R & D tax credit will, as they state, open up opportunity for a lot more businesses—and there’s no denying that or decrying that. But what we asked when the Minister came to our committee was: is this new money or is it going to be replacing the grants system that Callahan Innovation have led for the last four to five years? And it appeared that through discussion and questioning, in time the grants system from Callahan Innovation will disappear and it will be purely an R & D tax credit.

Look, I would see that as disappointing, because I do know there are companies where the grants system particularly works and is really needed. We do want to support people right across the business industries and industry, and some of the proposals that this bill talks about don’t work for everybody. So I would implore the Government to be open-minded and to look at different ways in which they can meet the R & D needs of these companies and industry in our country. Thank you, sir. I just finish with that point.

Thank you, Mr Assistant Speaker. Look, it’s a pleasure to rise in support of this Taxation (Research and Development Tax Credits) Bill. It is really important to recognise what these tax credits will do, because a grant, of course, is all very nice and no one’s ever going to turn down an offer of money, but a tax credit system really does demand from the business real accountability, because it’s real money that’s being spent, and a tax credit’s only ever any good if it’s, ultimately, claimed by a profitable business. That’s part of the model.

But we do know that research and development is going to be absolutely important in improving New Zealand’s productivity as we go forward. As Mr Young mentioned, 1.37 percent is our current GDP spend and we need that to go up. I did go to a very good session, which was chaired by Mr Young, on the kind of research and development that’s going on in New Zealand, particularly in the software space. It was a great event in a science forum on autonomous animation and human-machine collaboration, and what was very clear there is that you can’t always pick winners, that as research is undertaken sometimes you get a breakthrough and sometimes you don’t. One of the problems with a grants scheme is that the Government and Government bureaucrats set out to pick winners, and you simply can’t do it.

What an R & D scheme does is it rewards and encourages businesses who are embarking on research of their own. One of the things that was changed in the Finance and Expenditure Committee in respect of this legislation was a much greater acceptance of software as a really useful and appropriate innovation. So, in fact, there was a cap of $3 million of expenditure in the original bill. That has been increased to $25 million of expenditure. When we think of the tax credits that can be claimed there, that goes to show you the very significant investment that is being put into this tax credit.

Now, software does raise particular challenges because, as we know, particularly large businesses may well be developing software of their own. Large institutions, whether they be corporate institutions or educational institutions, they can spend very easily $20 million on their own internal software. So it was made very clear at select committee that those kinds of business-as-usual software applications that are developed in-house aren’t appropriate and they won’t be included in any tax credit regime.

But there is a real sense that we need to meet the market, so to speak; that a tax credit regime needs to wake up to the realities of how research happens. So there was a revisiting of the changes in identity of the parties claiming tax credits and, in particular, a recognition that joint ventures are a very important part of any tax credit regime. We need to accept that joint ventures from overseas can be participants with New Zealand parties in a regime of this nature.

So what we have here, then, is a very effective way—and I must say that a 15 percent credit is a very significant credit when we think of the corporate tax rate. It was, in fact, taken into account and increased from some early suggestions of a slightly lower rate. So that really is going to reduce the tax burden of a lot of these businesses. It’s going to be a significant reduction in the potential tax take of this Government, and, in light of that—in that sense—it really shows that this Government is committed to encouraging and entering into a partnership with businesses who are interested in embarking upon this.

So I’m very happy with this bill. It went through the select committee in what was mainly a cooperative way; worked through and really improved as a piece of relatively technical tax legislation. This is another step forward in making our economy ready for the modern world, productive, and good for all New Zealanders. Thank you, Mr Assistant Speaker.

Thank you, Mr Assistant Speaker. I rise as the final speaker on this side of the House in this particular debate. I have to declare that I have not been part of the select committee process and I may not be as well versed on this particular bill as my colleagues, but I have to say that, as earlier speakers right throughout this House have actually said, most of us like the idea of incentivising businesses to invest in research and development, whether it’s to promote their business or a product, to advance the growth of New Zealand’s economy.

Having said that, I was rather disturbed to hear during the interrupted debate last night about how the select committee process did not take place. Having actually been in this House for the last three terms—this is my fourth term—and having actually chaired different select committees, I have never, ever been in a position where, as chair, I have prevented an Opposition minority view being included in a select committee report to the House. I have to declare that I’m appalled by this Government’s behaviour on that.

Because the minority view was not attached to the main report, the National Party’s view on this bill was not attached to the select committee report back to the house. That means the public are actually not well versed on why we are opposing this bill.

So I shall read some of the comments—from the minority view—that were made by my colleagues who were part of the Finance and Expenditure Committee: “The National Party supported the bill in the first reading as we see merit in exploring the potential for taxation to incentivise greater investment into R & D, and to have the opportunity to explore [whether] the framework proposed by the Government would be the best way to do that [going forward].” It is actually clear, members have said, that this will not work for many companies and businesses, because this bill gives no real visibility of what additional R & D spending will occur as a result of significant items of expenditure.

One of the items in that National Party report that I am particularly appalled about is the fact that it says it is essential that businesses have certainty over the details. The minority view said: “The Government is determined to roll this policy out in 2019, and those that are pre-profit for now will be covered by temporary arrangements subject to review down the track, because as [the] … officials [actually advised], the issues were too complex to resolve now.” So it is far too complex for them to actually sort of say whether it’s actually right or not.

It seems really, really strange, and as, I think, Tamati Coffey said yesterday, the select committee refused the report of our spokesperson, Dr Parmjeet Parmar, because of one word—because they didn’t like a particular word. I think it’s time that this Parliament actually looked at the way select committees actually report back, and I think it’s essential that minority views are attached to the report-backs to this Parliament. I think it is appalling that the Government has behaved in this manner. I oppose this bill.

Unlike the previous speaker, Melissa Lee, I was in that select committee meeting, so I know exactly what happened in respect to the National Party minority view. With respect, the Government side of the House was entirely prepared to accept the minority view. Why would we not? It is important for minority views to be heard. In fact, in the last few days, I know there has been a discussion amongst members of this House as to how a minority view should be treated, and some agreements have been reached.

But there was an issue with the minority view that was prepared. There was a factual mistake in it that was attributed to officials. That was the sticking point. We asked for that particular sentence—one sentence—to be modified. In fact, one person had written that sentence and even that person’s own colleagues were urging that a change be made. The intransigence was not on this side of the House.

I think it highlighted a very, very important point, in respect to this particular bill. It is a research and development bill, but, in particular, it is a research and development tax credit bill. What that pointed out was the need for those who engaged in real debate on it to be familiar with the tax system as well as with the ideas behind science and research and development. There are critical interactions with the tax system engaged in this particular R & D measure. So in terms of understanding how it is intended to work and understanding what the real facts of the matter are, having that background knowledge of tax makes a difference.

So I want to talk about some of those particular issues. We have heard on the other side of the House some of the members there complaining that a tax credit won’t work for companies who are not in profit and how that’s going to be a problem for start-ups. But, as anyone who is familiar with tax would know, there is a provision in the bill—in the very bill itself—that enables a cash-out of credits for start-up companies who are in a loss position, provided they meet certain criteria. I direct members on the opposite side of the House to new section LA 5(4B), inserted into the Income Tax Act 2007 by clause 9 in this bill—which some members obviously need some familiarity with—and that provides for a cash-out of some of the credits to help exactly those companies who are engaged in R & D and need to get a bit of a hand on their way right from the start. It helps to know what you’re talking about sometimes.

Carrying on, I want to talk about some of the technical tax matters that are in this bill that help someone. As a select committee, we have worked hard on the issues in this bill, and amongst others things, in clause 10 we have inserted new subparts LY 8, LY 5, and LY 6 into the Income Tax Act, where it allows our R & D tax credits to be carried forward in cases where some shareholder continuity rules may or may not be met. Now, the shareholder continuity rules for carrying forward losses are quite complicated, but what we’re doing here is trying to ensure that the tax credits fit within those rules so that it maximises the amount of R & D tax credits that can be carried forward.

We also worked on other tax issues—again, which helps when you’ve got tax knowledge. So, for example, we looked at the interaction of this new research and development tax credit with the Callaghan growth grant recipients and how that would fit together, and some anomalies were pointed out. One in particular was to do with people with firms that happened to have a late balance date. Now, again, if you’re familiar with tax—as you need to be to engage with this properly—you’ll know that balance dates vary and they’re defined as early or late balance dates in relation to 31 March, actually, which is the standard balance date. Now, if you’ve got that familiarity, you know how the rules interact together, and that means that you understand why we need this particular little change in the bill to ensure that Callaghan growth grant recipients who have a late balance date can get as much from this tax credit as Callaghan growth grant recipients who have an early balance date. It’s about consistency and about getting it right within the structure of our tax system.

So I think the question for the Opposition is—and it’s a question they might care to examine in depth in the committee stage of this bill and a question they might like to have a look at in the third reading of this bill—do they support research and development or not? Do they support it or not? The Callaghan growth grants are a fine thing, but we still need to lift our R & D spend in this country further, and we need to broaden it beyond a grace and favour system.

Having had a look at the Callaghan system, it is complex, it takes a lot of effort to comply with, people go through long and extended processes in order to apply for a grant, and even then they may be refused. That’s the way that grant systems operate, and indeed it’s the way they ought to operate; there should be strict criteria. The useful thing about a research and development tax credit is that it is available to all taxpayers who meet the criteria, not just to those who fit within a certain envelope—all taxpayers who fit the criteria. It means that anyone who is doing significant research and development may apply for and get this tax credit, instead of a handful or a selected few. That’s the beauty of it, and that is why this particular research and development tax credit will, in fact, work to enhance research and develop innovation in our country. I support this bill.

The question was put that the amendments recommended by the Finance and Expenditure Committee by majority be agreed to.