By Rod Oram
As campaign promises go, allowing companies to write off 100 per cent of their research and development spending is a pretty good carrot in these days of the knowledge economy.
In fact it is so good, National had to follow Labour's lead and add it to its election armoury.
At first glance, full write-off of R&D costs seems like a sensible thing to do. It would simplify the current muddle whereby a company can write off research costs but if the research leads to a useful product it has to put the new asset on the balance sheet and depreciate it over time.
That's a system fraught with fudges about what can be written off versus being capitalised. Ambiguity leads to potential conflict between companies and Inland Revenue. The companies are seeking ways to pay for R&D by setting the costs against profits. But the IRD is trying to preserve the tax base by taking an increasingly hard line against the write-offs.
This attitude towards R&D expenditure is stingy by international standards and is probably one reason why New Zealand's R&D efforts are grossly inadequate compared with leading industrialised countries.
However, a 100 per cent write-off from whichever party forms the next government puts the cart before a pair of horses. It is a slick election promise but it begs two fundamental questions:
* What sort of R&D spending should we try to stimulate through tax policy?
* What expenses relating to those chosen forms of R&D can be written off?
Study of these issues is to be undertaken by a Ministry of Commerce working party which will include private sector members. The group is supposed to shed light on why R&D expenditure is so low in New Zealand and how policy changes - not just tax changes - might improve it.
But don't hold your breath for a breakthrough. Even though the party hasn't been constituted yet, it is due to report in March. That's far too short a time for it to understand the complex factors which influence corporate decisions about R&D spending and devise ways to stimulate it.
Moreover, 100 per cent deductibility from either a National or Labour government would narrow but not close the gap between New Zealand and our leading competitor countries. The likes of Australia, Japan, the US, Canada, France, Germany and Italy go further by granting tax credits for R&D, typically by allowing write-offs of, say, 130 per cent of the costs.
Such mechanisms are aimed particularly at small and start-up companies but they are also attractive to foreign investors considering building research and manufacturing facilities in those countries.
Whether a New Zealand government should engage in such an expensive and potentially distorting activity is where the real R&D tax debate lies. Simple election promises only gloss over the issues.
Write-off promises full of fudge
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