Parmar ParmjeetTAXATION (RESEARCH AND DEVELOPMENT TAX CREDITS) BILLIn CommitteePart 1 Research and development tax credits: year 1Dr PARMJEET PARMAR (National): Thank you Mr Chair. In Part 1 I would like to start from clause 7. Under clause 7 which inserts new section GB 56(2) it reads A person's entitlement to a research and development tax credit is reduced to the amount that the Commissioner thinks appropriate whether or not the person is a party to the arrangement." This is after the amendment that happened in the select committee process. I would like to get some clarification around this clause because this clause gives the ability to the commissioner to reduce the claim to whatever the commissioner thinks is appropriate.Within this part I jump to another clause which is clause 37B which amends Schedule 7 clause 39. It says "Agencies for research and development". Under that it provides the ability to the commissioner to communicate "to an officer employee or agent of the Treasury … of Callaghan Innovation of the Ministry of Business Innovation and Employment …". So basically what it says is that the commissioner is able to communicate with these people to evaluate anything that the commissioner needs in regards to this policy.Now we see that there is a Supplementary Order Paper from the Government. It's a very insignificant I would say Supplementary Order Paper because it's basically correcting some punctuation marks but in that it's also providing the ability to the commissioner to allow these people I have listed before to look into information that might be necessary or reasonably necessary for making a decision that is about administering R & D tax credits. So my question here is: what criteria are there for the commissioner to reduce this amount from what has been applied for? Businesses compete with each other. How will we know that the commissioner is applying the same kinds of criteria for each businessman the commissioner comes up with that new figure for?I understand the reason here is to see that there is no inflated amount put forward in the claim but still it's important that we know that the commissioner when the commissioner is making that decision—because this clause says that whether or not the person is a party to the arrangement. Without having the individual or the organisation that is spending on research and development being part of this arrangement the commissioner will come up with a reduced amount. So there are questions about this that I think it will be good if the Minister is able to answer because the tax credit amount is 15 percent and if the commissioner decides to reduce it it could be just 2 percent or 5 percent—the effective tax credit that that business will receive.The other question within this is that in this part the policy is mainly about 2019 to 2020 because the second part which we will talk about later on is for the policy that is implemented from 2020 onwards. In this one there is no preapproval requirement. So if there is no preapproval requirement as this policy has already come into effect from 1 April this year businesses will be already spending money thinking that they're going to get this 15 percent of tax credit. But after they apply if the commissioner decides that actually the commissioner is going to reduce that amount to the amount that the commissioner feels appropriate that is not going to be fair to businesses. This is not going to provide any kind of certainty to any business.The third point within this part is that if this is within the guidelines—which I can't understand because for a lot of the questions the answers we got during the select committee process were "Well this is going to be covered in the guidelines."—I think it's still important that we have transparency around the method that the commissioner will use to come up with the reduced figure otherwise that 15 percent tax credit means nothing because it could actually mean just 2 percent or 5 percent for a business. And if it is going to be based on some kind of market value it's important that we discuss that too because here we are talking about research and development which means we are talking about people doing new things to acquire new knowledge—people wanting to get some new insights into the things that happen around us.For that how do we have a list of market value decided for everything that researchers will do in the future? We cannot. We cannot do that because market value is available only if something is already available in the market and sometimes the researchers sometimes the scientists could be using different approaches to reach the conclusion that they want to or the knowledge that they want to acquire. So what kind of resource is available to the commissioner here to decide what the commissioner should be deciding as the new reduced amount? And if it is just to make sure that nobody is putting forward inflated figures then also how will the commissioner know that that is an inflated figure if something new is being done? Researchers have to try different kinds of things and if some researchers are going worldwide maybe then they are able to do something at a cheaper rate than someone who is just trying to access that resource from within New Zealand. So we have to be fair to these people.The most important point in this is that because the policy has already come into effect from 1 April this year businesses are already incurring expense on research and development hoping that they will be getting 15 percent of tax credit—because there is no preapproval in the first year. So how do we satisfy those businesses in terms of providing certainty that they will be definitely getting 15 percent of tax credit? This clause here does not give me any confidence that businesses will be able to get 15 percent of tax credit.Another very important component in this part is the refundability provision which is under clause 9. In clause 9 we talk about the refundability provision in this legislation. During the select committee process it was really interesting to see that some members didn't understand the difference between the R & D tax credit and the refundability provision because the criteria for the refundability provision are different from the criteria for the R & D tax credit. It is not the same. The question in this clause that I have for the Minister is that the maximum cap of the refundability provision is $255000 but if we look at the amount that people could access through the last R & D tax credit policy which was put in place by us the previous National Government when we were in Government that amount was more than $255000 which is the cap through the refundability provision in this legislation.So why would a business access this provision and not access the R & D loss tax credit through that policy that was put in place by the previous National Government? Also why put something that is different for a business that does not have enough tax liable income? If the real purpose is to improve business spending on research and development then it should be for all kinds of businesses. Moreover this provision here in this bill is a temporary provision because the Government has indicated—and during the select committee process officials also indicated—that the Government's intention is to develop a policy that will be implemented from April 2020 that will look into providing support or incentive to businesses that do not have enough tax liable income. So why put something so temporary—because this is creating a lot of uncertainty amongst investors and small businesses? I was talking to an investor. That investor is originally from here but is based in the US. He's invested in two scientific companies here in New Zealand. He said because of this—because they don't know what is going to come from April 2020—why would he be continuing to invest here in New Zealand companies. These investors are going to go around and look for other options.During the select committee process also we received some submissions on this clause and submissions came from different entities. So in summary what they said was that "Refundability is important to provide support to early stage businesses and needs to be progressed as a priority. Lift the refundability cap that applies in year 1". So that is definitely something that is of concern to businesses because a $255000 cap is not enough given there is a higher amount—a significantly higher amount—that businesses can access through the R & D loss tax credit policy. But the response that we received during the select committee process from officials was—this is not word to word but overall—that the Government is developing a policy from April 2020 and so at that time this will be taken into consideration and consideration will be given to allowing R & D tax credits that were carried forward from the 2019-2020 year to be refundable.Another answer that we got during the select committee process was that a tighter regime in the first year of the regime is a useful precaution because in-year approval of the R & D activity will—[Time expired]"