Sio Hon Aupito WilliamTAXATION (RESEARCH AND DEVELOPMENT TAX CREDITS) BILLSecond ReadingHon AUPITO WILLIAM SIO (Minister for Pacific Peoples) on behalf of the Minister of Research Science and Innovation: I move That the Taxation (Research and Development Tax Credits) Bill be now read a second time.This is an important bill for our economy. While total research and development spending increased to $3.9 billion in 2018 or 1.37 percent of GDP New Zealand still lags behind the rest of the world. This bill therefore is part of the Government strategy to address that and to boost our economy through support for research science and innovation. The support that this bill promises for business has been generally welcomed by submitters to the select committee and rightly so. The New Zealand economy is better off when businesses are encouraged to be bolder think laterally and invest more in novel ideas.In bringing this bill to its second reading I'd like to thank the Finance and Expenditure Committee (FEC) for their work on this bill. In particular the committee has made some very valuable recommendations to this bill which I would like to briefly run through.The purpose of the controlling rights requirement in the bill is to ensure that R & D contractors are not able to claim for R & D activities they perform for other people. The Finance and Expenditure Committee recommendation is to make several amendments to ensure that joint ventures undertaking R & D are eligible for the tax credit which would otherwise be excluded.In the bill as introduced contractors' profit margin was removed from the calculation of the credit with the aim of giving equal treatment to expenditure on R & D performed in-house and by contractors. However the Finance and Expenditure Committee considers that splitting out the profit margin could incentivise businesses to conduct R & D in-house when it would be more efficient to outsource it. In that way the cost of the profit margin would be part of the true cost of performing research and development. The FEC has recommended that it be considered eligible expenditure for the credit.In the bill as introduced expenditure on internal software development over $3 million would not be eligible for the credit. The committee considers that the existing provision would unduly cap some internal software development expenditure that would have a spillover benefit for New Zealand. The recommendation therefore is to increase the internal software development cap from $3 million to $25 million in order to better reflect the distinction between internal software development which has an external focus and external software development. The committee also recommends amending the legislation so that internal software development undertaken for the purpose of internal administration would be excluded from receiving the credit.Turning now to integrity measures. In designing the measures contained in this bill the Government has been careful to protect the sustainability of the scheme by building in checks and balances. I'm very pleased to see that the FEC was of a similar mind and they have made some very useful recommendations to protect the integrity of the scheme. The bill as introduced allows for activities and expenditure to be considered as eligible or ineligible R & D by Order in Council. The Government's view was that frequent fine-tuning of this scheme is preferable to periodic major changes which can be unsettling and undermine business confidence. The bill therefore allows for this fine-tuning through regular review and the ability to adjust the scheme by Order in Council as required. While not disagreeing with the central concept the committee considered this power needed to be tightened up and only used in defined circumstances.The policy intent of this bill is to encourage businesses to undertake additional R & D. The committee considered that a business reclassifying expenditure would not necessarily encourage additional R & D. In some cases it is simply changing the way costs already incurred are viewed in order to secure the tax credit. They therefore suggest that a person should file their R & D supplementary return by the due date if they would like to make a request to amend their R & D tax credit assessment. This would limit a claimant's ability to retrospectively reclassify expenditure as R & D expenditure.The committee made one other recommendation to limit claimants' ability to retrospectively reclassify expenditure as R & D expenditure. The bill as introduced allows the commissioner to increase a person's R & D credit claim up to two years following the expenditure. The committee has recommended reducing the maximum time frame from two years to one.The bill as introduced contains an in-year approval process. This allows taxpayers to have their expenditure considered for eligibility under either the general approval or the significant performer regimes. The committee has recommended that if a significant performer was unsure whether its activities would satisfy the core or supporting R & D activity definitions it would be beneficial to allow the business to obtain general approval for these activities. Allowing significant performers to use the general approvals regime would give them more certainty about the eligibility of those R & D activities but it also provides a greater level of scrutiny from Callaghan and R & D officials.The same thinking is behind the committee's recommendation that supporting R & D activities should also be able to be considered under the general approval regime. The committee foresaw instances where an application could be declined and felt that claimants should have the opportunity to discuss their applications and provide additional supporting information if appropriate. The recommendation therefore is that the commissioner should contact the claimant before declining their application.Finally the committee has also suggested a pilot programme for the in-year approval mechanisms the general approval process and the significant performer regime for year one of the regime. This would allow IRD to improve the in-year approval process before it is rolled out to all claimants in the second year.These worthy adjustments from the Finance and Expenditure Committee to the draft legislation join the other safeguards which were already built into the scheme including that claimants must satisfy certain general criteria to be eligible for R & D tax credits that the tax credit is available for R & D that happens primarily in New Zealand rather than offshore and that claimants have to perform at least one core activity in New Zealand. We also have an anti-avoidance rule and a requirement to publish claimants' details in a five-yearly evaluation to name a few of the measures. We want to ensure that the R & D we are supporting will contribute to the kind of groundbreaking thinking that we want to encourage so there's also a test that there is genuine scientific and technological uncertainty.As an aside I think it is worth mentioning that questions of what qualifies as genuine scientific and technological uncertainty are not being decided by tax officials alone. Callaghan Innovation will be advising Inland Revenue in its administration of the scheme. In many cases it will be a case of one scientist discussing the merits of an R & D project with another scientist.That is a brief overview of the most important changes made to the bill and once again I thank the committee for their important contributions to this bill. R & D performed by businesses results in new products and services helping to strengthen and diversify the economy and improve international competitiveness. This bill gives crucial support to businesses who are striving to open up new fields of enterprise. So it is with pride that I commend this bill to the House.