Parker David: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In CommitteeText is incorporated into the Bound VolumeParker David: Taxation (Annual Rates for 2015-16 Research and Development and Remedial Matters) Bill — In Committee[Sitting date: 03 November 2015. Volume:709;Page:7680. Text is incorporated into the Bound Volume.]Hon DAVID PARKER (Labour): I want to carry on while we are debating this part with the discussion that we have just commenced through Stuart Nash on tax credits for research and development tax losses. The history of research and development tax losses in our tax legislation needs to be referred to. For many many years New Zealand has had a low level of expenditure on research and development in the private sector relative to other OECD countries. Stuart Nash is quite right when he points out that the incentive to under-report research and development expenditure is higher in New Zealand than it is in other countries because you cannot claim a tax deduction for a lot of that expenditure and you are meant to capitalise it and then amortise it. If as a taxpayer you can categorise that as another category of expense and therefore get a tax deduction in the year it is spent you are better off to do that and as a consequence there will be some areas of research and development expenditure that are reported as research and development expenditure in other countries that actually are appearing as other categories of expenditure in New Zealand in order to get that tax deduction.Notwithstanding that there is almost universal agreement in New Zealand that levels of research and development expenditure in New Zealand are lower—that is private sector research and development—than in other countries even when you adjust for that anomaly and that that is one of the reasons why New Zealand’s export performance is worse than it would otherwise be. Because of that historic under-investment in research and development the last Government in the last term of that Government introduced a research and development tax credit of 15 percent qualifying expenditure. The current Government came to power and axed it and it axed it in order to fund amongst other things a decrease in the corporate tax rate I think to 28 cents in the dollar—was it 30 to 28 or did it go down in two stages; I forget the history but it went from 30 down to 28 percent—and it also funded income tax cuts which were as other people have said in other parts of this debate weighted to those who were at the higher end of the income spectrum with 40 percent of the income tax cuts going to the top 10 percent of income earners.The Labour Party at the time was critical of that because we thought that although it was true that some of the money that was received by companies for research and development tax credits would effectively be a tax credit for what they already spent albeit characterised as other sorts of expenditure overall it would have lifted the increase of research and development tax expenditure and that was modelled by Treasury. Treasury opposed the abolition of the research and development tax credit and said that New Zealand’s economy would be weakeras a consequence. The Inland Revenue Department at the time opposed a research and development tax credit and I think it is a matter of public record of a lot of those people who went through the initial stages that they actually found the Inland Revenue Department at that stage quite unreasonable in the way in which it implemented the controls around the research and development tax credit and made it difficult to access.In any event what happened subsequently to that was that the Government found that its export target of increasing exports from 30 to 40 percent of the economy went wrong. Indeed exports as a percentage of the economy instead of increasing from 30 towards that 40 percent target have gone backwards and have dropped to under 30 percent of the economy—to around 28 or 29 percent of GDP and still dropping.As a consequence of that the Government says “Well we’ve got to do more than we’re currently doing in respect of research and development incentivisation.” and it has in new Subpart MX inserted by this bill introduced these new rules in respect of smaller entities that are intensively investing in research and development that do not have other areas of income that they can take advantage of and that they can offset their qualifying research and development expenditure against and therefore ought to be able to get it paid out to them as a credit particularly when they are small companies and they are cash-flow negative.The Labour Party supports that and that is why we are supporting this part of the bill but I do want to highlight what I think are the inconsistent arguments that are being run against research and development tax credits generally by what is happening here. The Government said that research and development tax credits were too complex to operate and yet it has actually got a system here that is more complex than you would have if you had universal rules. Stuart Nash has gone through some of the definitions of the eligibility criteria to determine whether you come within these rules.Look I want to incentivise research and development tax expenditure in New Zealand and I do not object to it being done for these companies but it is somewhat ironic that the Government said that it opposed these sorts of initiatives because of complexity and yet the rules surrounding this bill include rules relating to the research and development intensity of a firm in order for it to qualify. New section MX 1 says that Subpart MX applies to a person—which includes a company; it is a corporate person as well—only if “the wage intensity criteria in section MX 3 are met;” and there are intellectual property outcomes that are intended for the benefit of the company.To get to what that means you then have to look at new section MX 3 which sets out the wage intensity criteria and it is complex. It sets out a formula that has a different rate for example that you can claim in respect of contracted-out research and development expenditure compared with that which is done internally. That is in subsection (3) of the formula in section MX 3. Then it sets out proportions that you can claim for each of them. It then in the next section new section MX 4 sets out that there has to be a tax credit equal to at least the amounts that are set out for various years—very very complex.Then there is section MX 5B which I do not quite understand and I would be interested to hear the Minister explain it. Section MX 5 says that you have got to extinguish your tax loss to the extent that you have had a research and development tax loss credit. That is fair because you do not want the Government paying out a tax loss credit and then people carrying forward a research and development tax loss that could then in a future year be used to reduce your income tax when you were in profit. That would not be fair so they are stopping double-dipping there but then section MX 5B is titled “Deduction if increase in basic tax rate for company”. When this section applies it says that if the person “has an R&D loss tax credit for a tax year” which they call the “credit year” before the current year“for which the basic tax rate for a company is increased (the rate increase) if the rate increase results in a basic tax rate for a company that is greater than the basic tax rate” for the latest year or the credit year then various formulae apply.Again the complexity of this is extraordinary. For the Government to persist in pretending that its mistake in abolishing the research and development tax credit was not a mistake and to come back with this narrower version of a credit for a research and development tax credit—in terms of the ambit of the economy to which it applies which is narrower than the former research and development tax credit—and pretend that 7 years into its Government with exports going down as a percentage of the economy instead of up as it promised is galling. I would like the Minister to take a call and say how the Government can support this provision in respect of a narrow set of research and development and logically oppose broader research and development tax credits. If this sort of tax credit is accepted as stimulating research and development effort in a way that benefits our economy grows the breadth of our exports and grows the sophistication and value of our exports why does that same argument not hold true in respect of other areas—