The only trouble is pesky facts keep popping up to undermine our dreams. The latest is an obscure, but important, change in US tax policy that will affect New Zealand.
To explain, it involves a small detour in accounting. Normally start-up companies lose money in the early days and are helped along in those formative years by freedom from tax bills. This is because they can fully offset their people costs against any revenue in any year they are unprofitable.
The change the US has signed into law requires the cost of people working in research and development (R&D) in places like New Zealand to be capitalised and depreciated over a 15-year period.
So, if a US start-up made say $1 million in revenue but spent $2m in R&D costs in New Zealand, it could owe up to $182,000 in US Federal tax despite its cashflow still being highly negative.
But how does a change in the US affect us, you ask? In several ways.
1. No longer a home for US tech talent
First, US citizens will not want to move to New Zealand to start a tech business. Americans are required to pay taxes to Uncle Sam even after they are permanently resident in another country.
You may have noticed that Americans don’t like tax and generally won’t move to countries that result in paying even more tax. Sure, we’ll still have great Kiwi founders, but the idea that we can be a home for US talent just went out the window.
2. Harder for Kiwis to raise
Second, NZ entrepreneurs will find it harder to raise capital from the US. These US tax obligations kick in when over 50 per cent of a company’s shareholders are American, even if the entity remains foreign domiciled.
Investing in companies that have non-US R&D just became much less attractive to offshore venture capitalists or even to US investor migrants to New Zealand.
3. Less attractive target
US companies are less likely to buy New Zealand companies. While there is a lot of hype about “IPOs”, in fact most successful New Zealand tech companies get acquired by larger offshore companies. Any US acquirer now needs to factor in the extra cost of this new tax obligation. That makes their return on investment hurdle on an offshore acquisition harder to meet.
Lastly, US tech companies are less likely to establish engineering centres in New Zealand. This is really important, since many emerging start-up ecosystems are accelerated by the osmosis from employees spinning out of large tech to start new ventures.
Being uncompetitive as a location for R&D effectively removes a common flywheel for growing our country’s tech capabilities.
Like a huge tariff on dairy
Tax policy can be dry, but is a critical foundation for driving economic growth.
These changes in the US happened without any commentary or push-back from our politicians. There is no “out” through tax treaties between our countries.
This is not too different from the US Government doing something like randomly deciding to put a huge tariff on our beef or dairy exports. It’s deeply protectionist and surprising from a country that is already so completely dominant in the global technology sector.
Economic development lives on hope and aspiration but it also requires deep attention to the nitty-gritty detail of cross border policy. We need our politicians and policy makers to ensure the “great American dream” does not squash our heartfelt Kiwi dreams.
Lovina McMurchy (Ngāti Rongomai) is the chief operating officer for Wellington-based start-up Kry10. Based in Seattle, she was previously a general partner for Movac and held senior roles with Microsoft, Amazon and Starbucks in the US.
