Accounting for R&D
There's little incentive for Kiwi companies to account for R&D, so what's the answer?
Monday, November 14 2011 || Comment || BY Igor Portugal
I don't believe that the statistics are accurate. New Zealand companies don't have an incentive to account for R&D. In fact there is a big disincentive to account for it. If you hired someone or purchased something and your intention is R&D, that means that it is a capital expense. Capital expenditure is not immediately tax deductible.
You have to capitalise and depreciate it. This means that not only you are out of pocket for investing into something that doesn't bring you any immediate return, but you also can't claim it as tax deductible expense. I believe that the way New Zealand businesses structured is to ensure that their efforts are considered operational expenses and not R&D. This is why the statistics are inaccurate and meaningless.
However, there is a perception that investors looking at the reports pass us by. I don't believe that to be an issue either.
Technology investors, in particular, are looking for two things: Availability of talented people to perform the R&D and markets to sell the resulting products. In New Zealand we are short on both.
However, some would argue if all it takes to get on their radar is an accounting change, why not?
It is not as simple as an accounting change - people will lose real money. However, even if it was simple, a
government statistic is still not enough incentive for businesses to change accounting practices.
Labour's answer to the problem was to introduce tax rebates for R&D. That policy didn't achieve the desired result. The definition of R&D was too narrow and didn't cover any real commercial R&D. However, being a tax credit - translation, cash handout, if you made the definition any broader, anyone and everyone would be asking the government for cash.
The problem of trying to drive R&D through business tax incentives is that by its nature, R&D doesn't produce any
immediate income, therefore there is no tax to pay. So what can you do?
Here is one possible two step solution:
1. Make all R&D-related expenses 100% tax deductible, same as operating expenses; This step will remove the accounting disincentive. However, in itself it is not enough.
2. Reduce the income tax burden for all employees that are engaged in Research & Development activities. Make it so the higher the qualification, the lower the tax burden.
This will achieve many goals:
• It will be more attractive for people with higher education - scientists, engineers, programmers etc, to stay in
New Zealand
• Educated people from overseas will want to come and work here so they can earn more
• It will be more attractive for investors to set up shop in New Zealand - they will have happier staff earning
more money without businesses having to pay extra.
• It will be more attractive for business people to account for R&D appropriately - their staff will earn more so
will be happier to stay
• It will be more attractive for young people to pay for higher education - your student loan is no longer such a
burden, it will be paid for by the tax break
• You will have young people more interested in science and engineering than arts and law
• You will have larger pool of talent so international technology investors will be interested in coming here to set
up shop.
This policy is not too expensive to implement. According to that OECD report there isn't much R&D accounted for in New Zealand, so there will be minimal revenue loss to the government. They will pay in tax breaks to the researchers, however that will be made up by other activity of the companies doing R&D. Also, the ratio of research to other staff in those companies is pretty small.
It will also be a very minor cost to businesses: we already have a system of PAYE tax codes, so all that needs to be implemented is a new code.
This policy is also really easy to sell to the public: you are not giving any money to someone as extra profit. You are leaving more money for the worker - the researcher and the engineer.
Igor Portugal is CEO and co-founder of IP telephony company Vadacom.
Good point.
If all you do is reduce tax for the workers, you are not giving out any grants, so there is nothing to repay.
Posted by Igor Portugal at 03:07 on November 14, 2011
You forgot the other issue with R&D. If it has to be capitalised, and the item is not 'depreciable property' then you dont get a tax deduction - ever.
Agree that R&D should be deductible up front or at least over a 5 year period (per Australia?).
I also think all government 'grants' should be non recourse, convertible notes - repayable if you hit it big (or converted into equity) but written off if it doesn't work out.
Posted by Anonymous at 02:15 on November 14, 2011
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