Businesses in New Zealand have two years to adjust their claims for R&D tax credits after the government announced it was repealing the benefit from the 2009/2010 income year.
In a taxation bill introduced on December 9, the government said it was concerned that under the existing system much of the credit funded R&D projects which would have occurred in any case.
It also said it was aware that the compliance costs associated with claiming the credit were high and some of it was paid out on standard operating expenditure re-characterised as R&D expenditure.
The government said it thinks there are better ways to target funding towards research that will be valuable for the country.
Tax professionals have mixed views about the move.
"We are disappointed with this decision," said Thomas Pippos, a tax partner at Deloitte in New Zealand.
"The regime is only in its infancy with no returns having been filed, so anecdotally there is no New Zealand experience in relation to the regime not working that has fed into this decision," he said.
He also said the repeal is counterintuitive. "These regimes are common internationally and have been proven to assist in stimulating private sector R&D," he added.
"The global competition is no better evidenced by the fact that Australia has a fully operating R&D regime that it is looking to make even more attractive," Pippos said.
But Niels Campbell from Bell Gully, a law firm in New Zealand, said the decision was predictable. "Given that the deteriorating global economic outlook has pushed the country into recession, New Zealand needed an immediate economic stimulus to encourage spending. Once further borrowing was rejected as being fiscally imprudent, cuts had to be found," he said.
The government said that removing the R&D tax credit will partially fund the reduction in personal tax rates and that the benefits of reducing tax rates are certain, whereas the benefits of the R&D tax credit are less certain.
"Over the years there has always been debate as to the extent of benefits from tax incentives – in particular do they incentivise new activities or fund existing or reclassified activities," Campbell said.
"Tax cuts providing a much needed economic stimulus versus a tax incentive of debatable effect. No choice really."
Pippos said the best approach for the government to have taken would have been to bring forward a post-implementation review, where the benefits of the regime could have been compared against actual fiscal costs, and for an informed decision to have been made rather the regime being jettisoned without any real appreciation of its benefits or fiscal costs.
While this is the R&D tax policy in New Zealand, French president Nicolas Sarkozy has said that as part of an economic recovery plan, any outstanding R&D credits not offset against corporate tax will be immediately refunded in 2009 to companies regardless of industry. In practice, this will benefit loss-making companies and companies with insufficient corporate tax liability to absorb the credit.
Before Sarkozy's announcement, French companies that incurred R&D expenses in France could take advantage of a tax credit ranging from 30% to 50% of the expense incurred. The R&D tax credit could be offset against corporate income tax owed by the company. If the credit was not fully offset within a three-year period following the year the credit was computed, it was reimbursed by the French tax authorities.
