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R&D Tax Credits may not be the best

Media Release
10 October 2008

R&D Tax Credits not the best way to Increase Research Expenditure

Research and development expenditure is essential for the New Zealand economy but tax credits are not the best way to increase it according to the Wellington Regional Chamber of Commerce.

“New Zealand's private sector spending on research and development is low compared with most other OECD countries and we need to increase our investment in it, but we do not see tax credits as the best way to achieve this,” said Chamber CEO Charles Finny.

“We believe reductions in tax rates are a better way to achieve an environment where research and development expenditure is worthwhile.

“The R&D tax credit is expensive. It is estimated to cost around $400 million a year. That is about as much as it cost to reduce the company rate from 33% to 30% for example. Yet the tax credit erodes the tax base without guaranteeing any new R&D expenditure above what businesses were going to do anyway.

“As Business New Zealand noted in their submission last year, there is anecdotal evidence from Australia that some businesses have hired people in a full-time capacity, just to identify what they can claim under the incentive, even though there may be no new R&D taking place.

“There is no guarantee of quality R&D expenditure when it is not market driven and there is the potential for business practices to change simply to obtain the tax credit. Tax accountants are among the biggest beneficiary of the scheme.

“Other problems with R&D tax credits are that what qualifies is often ill-defined. A lot of film sector work for example is excluded. This is an important issue for Wellington.

“In spite of our dislike for tax credits, we are not opposed to some role for government and we note that even if the tax credit were to go, the existing100% write-off would remain which is, in itself, quite an incentive to spend on R&D.

“We also believe that if a new government were to repeal the tax credits there would need to be an urgent review of government grant schemes such as those run by NZTE and FoRST. There should also be a need to take account of decisions that have already been made by busineses as a result of tax credits given the disruption they may face if removed straight away.

“We favour a low-rate, broad-based tax system rather than a series of tax breaks. In general, tax incentives do more harm than good through the distortions they create, their eroding of the tax base and the resulting increase in compliance and administrative costs,” Mr Finny concluded.


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