To the Government’s credit

Published in Insights, The New Zealand Initiative’s newsletter, 25 May 2018

If politicians could make companies more productive and innovative by decree, they would have done so a long time ago.

That did not stop the previous government from actively trying to steer companies’ research and development activities. In 2008, it abolished R&D tax credits and introduced innovation growth grants administered by Callaghan Innovation in their place.

As widely expected, the new Government axed these grants in last week’s Budget and wants to revert to a tax credit system. In the future, companies should be able to claim a 12.5 percent tax credit on “eligible expenditure”.

If you feel unsure what to make of this decision, so do I.

On the one hand, it is a courageous decision by Minister Megan Woods to end the Callaghan grants. They had always been problematic because they required picking winners and smacked of corporate welfare.

So congratulations to Minister Woods for ending this flawed policy.

On the other hand, R&D tax credits are not without their own problems. The first among them is the practical implementation of the scheme.

To administer tax credits, the government first needs to define what qualifies as R&D. It is unlikely that everything that companies regard as R&D will count. We can expect the Government to prescribe activities that are specifically excluded, just think of anything relating to oil and gas exploration. So the government will no longer pick winners but losers.

Once that question is solved, it will need to be decided which parts of R&D expenditure get a tax credit.

The scheme is then likely to be capped at a certain amount per company, with the Minister able to permit tax credits beyond that limit for specific companies.

You get an idea of the potential complexities of R&D tax credits by looking through the Government’s consultation documents on the Ministry of Business, Innovation and Employment’s website.

As much as I would like to applaud the Government for abolishing the grants scheme that was wrong on more than one level, I feel nervous about replacing it with tax credits. Though well intentioned, these credits could easily become a battlefield for bureaucrats, lawyers and accountants.

R&D tax credits sound like a simple idea to promote innovation. Let us hope they do not primarily drive innovative behaviour within the tax profession.


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