New Zealand R&D Tax Incentive: Policy changes from the Discussion Document

Transcription

1 New Zealand R&D Tax Incentive: Plicy changes frm the Discussin Dcument Design features Discussin paper n a Research & Develpment Tax Incentive fr New Zealand (April 2018) Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Eligibility All businesses, regardless f legal structure, will be eligible t claim the Tax Incentive. Cnsideratin as t whether State Owned Enterprises (SOEs), Crwn Research Institutes (CRIs), district health bards (DHBs), and tertiary institutins - and subsidiaries - shuld be excluded. Industry research cperatives (including levy bdies) wuld be eligible. Tw thirds f respnses indicated that exclusins fr SOEs, CRIs, TEOs, DHBs and subsidiaries wuld be cunterprductive. In the case f SOEs it was seen as ptentially anti-cmpetitive. All businesses, regardless f legal structure, will be eligible t claim the Tax Incentive. Industry research cperatives (including levy bdies) will be eligible fr the scheme. State Owned Enterprises and Mixed Ownership Mdel cmpanies will be eligible. CRIs, DHBs, and tertiary educatin rganisatins, and majrity wned subsidiaries will be ineligible. Recipients f Callaghan Innvatin Grwth Grants (fr the same incme year) will be ineligible.

2 Discussin paper n a Research & Develpment Tax Incentive fr Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Cntrl and wnership f IP A business must have cntrl ver the R&D activities; bear the financial risk and effectively wn the results f the R&D. Respnses indicated the requirements t have effective wnership f IP did nt reflect business reality in 2018, where NZ-based subsidiaries wuld undertake R&D fr a parent withut bearing the risk r having wnership f the IP. Cntrl ver activity The business r a cmpany in the same crprate grup must have cntrl ver the R&D activity. Bear the financial risk There is n requirement that the persn bear the financial risk f the activity. Ownership f results Eligibility applies where the business undertaking the R&D wns the results f the R&D; r The business undertaking the R&D can use the results fr n cnsideratin; r Anther cmpany in the same grup wns the results f the R&D and is resident in a cuntry with which New Zealand has a duble tax agreement.

3 Discussin paper n a Research & Develpment Tax Incentive fr Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Rate Minimum threshld A 12.5 per cent tax credit n eligible expenditure will be available t business ding R&D in New Zealand. A business will need t spend a minimum f $100,000 n eligible expenditure, within ne year, t qualify fr the Tax Incentive. The minimum threshld will nt apply t R&D activities utsurced t an Apprved Research Prvider. Respnses generally indicated that the prpsed rate was lw cmpared t Grwth Grants r ther internatinal schemes and may nt induce additinal R&D. Als nted that the credit rate under the 2008 scheme was 15 per cent. Respndents t the cnsultatin generally indicated that a threshld set at $100,000 wuld be t high, and instead shuld be lwered. The main cncern was that such a threshld culd impact detrimentally in particular n small businesses, as well as startups. The rate fr the Tax Incentive will be set at 15 per cent. A minimum threshld fr the scheme will be set at $50,000 a year. Businesses that cntract their R&D t Apprved Research Prviders will be able t access the R&D Tax Incentive even if they d nt satisfy the minimum threshld.

4 Discussin paper n a Research & Develpment Tax Incentive fr Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Cap n R&D expenditure A business will be able t claim a tax credit fr up t $120 millin f R&D expenditure each year. This equates t a tax credit f $15 millin each year based n a 12.5 per cent rate. In rder t incentivise spending n R&D abve the level f the cap the ptins are t: Have a Ministerial discretin t waive the cap fr genuine claims; r Submissins received during cnsultatin generally supprt the prpsal fr a $120 millin cap. The majrity f respndents additinally preferred the ptin f pre-registratin as ppsed t Ministerial discretin in incentivising R&D expenditure beynd the cap. A cap fr the tax incentive will be set at $120 millin. Businesses that may exceed the level f the cap can apply fr an extensin abve this figure. They will be required first t demnstrate that New Zealand will derive a substantial net benefit frm the intended cmpletin f the R&D. T require pre-registratin fr large claims.

5 Discussin paper n a Research & Develpment Tax Incentive fr Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Definitin f R&D The incentive is intended t supprt R&D that address a material prblem and anticipates a material advance in science r technlgy. R&D wuld be defined as: Activities cnducted using scientific methds that are perfrmed fr the purpses f acquiring new knwledge r creating new r imprved materials, prducts, devices, prcesses r services; and General cncern fr the prpsed definitin, particularly with the prpsal t limit R&D prjects t thse cnducted using a scientific methd. Viewed as verly restrictive and nt reflective f R&D cnducted in New Zealand. The requirement t use scientific methds has been replaced with a requirement t use a systematic apprach. Cre R&D activities must be perfrmed fr the purpse f acquiring new knwledge r creating new r imprved prcesses, services r gds and must seek t reslve scientific r technlgical uncertainty. The test fr scientific r technlgical uncertainty will be the cmpetent prfessinal test. Intended t advance science r technlgy thrugh the reslutin f scientific f technlgical uncertainty. If the infrmatin t reslve the scientific r technlgical uncertainty is publically available r culd be deduced by a cmpetent prfessinal in that field, then the activities d nt meet the definitin f R&D. If a cmpetent prfessinal is unable t tell a business whether it is pssible t achieve the desired result withut a series f tests r analysis r building a prttype, t reslve the uncertainty, then there may be R&D that meets the definitin.

6 Discussin paper n a Research & Develpment Tax Incentive fr Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Businesses in tax lss The Gvernment is cmmitted t prviding a better plicy ptin t supprt businesses that are in tax lss r which have insufficient taxable incme t use their tax credits. Officials are undertaking further wrk t cnsider supprt fr such cmpanies and will cnsult with stakehlders as plicy psitins are develp. Frm April 2020, an apprpriate plicy incrprating additinal features supprting businesses in tax lss will be intrduced. A number f submissins indicated that they wanted the R&D Tax Incentive t be refundable frm the start. Firms will be eligible fr a refund f their tax credit fr R&D expenditure f up t $1.7millin (this equates t a maximum refund f $255,000), if: they meet the crprate eligibility test and the wage intensity test fr the R&D tax lss cash ut (MX 2 and MX 3 f the Incme Tax Act 2007) they are taxpayers their activity and expenditure meets the eligibility tests f the R&D tax incentive. Tax credits nt refunded will be carried frward. There will be n change t the R&D tax lss cash ut scheme. Firms that are eligible fr the R&D tax lss cash ut and fr the R&D tax incentive, nting the definitins f eligible R&D differ between these schemes, can receive cash under bth schemes. The Gvernment remains cmmitted t further plicy wrk fr intrductin frm 1 April 2020.

7 Discussin paper n a Research & Develpment Tax Incentive fr Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Eligibility f R&D carried ut verseas Up t 10 per cent f the eligible expenditure n an R&D prject can be fr verseas R&D csts if: The verseas wrk is part f an R&D prject based in New Zealand; and A small number f respnses t the cnsultatin indicated that imprtant R&D can ften take place verseas beynd the 10 per cent level. The Tax Incentive permits that up t 10 per cent f an annual claim can be verseas R&D. Transitin frm Grwth Grants At least half the R&D expenditure within a prject is fr activities carried ut in New Zealand. The Grwth Grant administered by Callaghan Innvatin will be phased ut with the intrductin f the Tax Incentive. All businesses with an active Grwth Grant n 31 March 2019 will cntinue receiving Grwth Grant funding fr R&D perfrmed thrugh t 31 March A number f submissins t the cnsultatin indicated that they wuld like a lnger time t transitin t adjust t the new scheme. Grwth Grants recipients that have an active Grwth Grant n 1 April 2019 will have an autmatic tw year extensin t allw them t remain n their Grwth Grant fr up t tw years (up until 31 March 2021 at the latest). The existing arrangements fr Grwth Grant will cntinue until 31 March Recipients with expiring cntracts must apply and satisfy the criteria fr renewal. Fr thse cmpanies wh d nt meet the criteria fr renewal the Gvernment will allw a cntract extensin until 31 March 2019 r the end f a recipient s 2018/19 incme year, whichever is later.

8 Discussin paper n a Research & Develpment Tax Incentive fr Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Administratin Inland Revenue will administer the R&D Tax Incentive, supprted by Callaghan Innvatin. The design f the administratin will have a custmer fcus t prvide certainty fr claimants. Respndents expressed a desire fr greater certainty within the prcess f applying fr and receiving the R&D tax incentive Inland Revenue will administer the R&D Tax Incentive, supprted by Callaghan Innvatin. Tax incentive claims shuld be filed alngside firms incme tax returns. Firms will be able t make amendments t their tax incentive claims prvided the amendments are ldged with Inland Revenue within ne year f the latest date fr filing their incme tax returns. Starting in the secnd year f the tax incentive (the 2021 incme year): Businesses will be required t receive apprval f their R&D activity in the year in which they are cnducting it. This apprval will be binding n Inland Revenue and will mean that firms have cnfidence that their activity meets the test f being R&D. Fr firms spending mre than $2,000,000 n research and develpment, different prcesses will apply.

9 Discussin paper n a Research & Develpment Tax Incentive fr Respnses frm cnsultatin Gvernment decisins n the design f the R&D Tax Incentive Eligible expenditure n R&D Tw pssible appraches fr determining eligible expenditure. Either: Slely n direct R&D labur cst; r On a brader range f direct and indirect csts (including ptins fr determining apprpriate verhead expenditure). Respndents generally did nt favur limiting eligibility t labur csts, with cncerns that such a test wuld nt accurately capture R&D expenditure. In cntrast the inclusin f verheads received mre supprt because it wuld be easier t administer. The Gvernment prpses t base eligible expenditure n a brad range f actual R&D csts, fr example: Salary and wages f emplyees ding R&D; Depreciatin n assets used in the R&D; The csts f cnsumables used in the R&D; and Overheads. Apprtinment rule fr dual purpse expenditure If an activity was carried ut bth fr a R&D purpse and nn-r&d purpse, the entire activity wuld nt qualify as a R&D activity. Mst submissins received said the dual purpse exclusin culd prevent many f their R&D activities frm qualifying fr the incentive. The accunting treatment f expenditure will nt determine eligibility. Hwever, R&D expenditure that is capitalised and that will frm part f the cst base f a depreciable, tangible asset, will nt be eligible. If research and develpment activity ccurs in the curse f cmmercial prductin, amunts paid t emplyees wrking n the research and develpment plus additinal csts as a result f undertaking the research and develpment, will be eligible expenditure.