These days, it’s rare to find an advanced or leading emerging economy that doesn’t offer tax incentives to encourage research and development (R&D). New Zealand is an exception, but it could soon join the club, as the Government recently announced its intention to introduce R&D tax breaks.
The Government wants to increase R&D expenditure to 2% of GDP by 2027. It announced plans in April 2018 to introduce a 12.5% tax credit on eligible expenditure against taxable income for businesses carrying out R&D in New Zealand. This credit would be available for R&D expenditure incurred from 1 April 2019.
According to the Government, the rate is broadly similar to the levels of R&D tax breaks seen across the OECD country grouping.
The Government said that the credit should apply to all eligible expenditure and not apply only to incremental spending.
The Government also intends that all businesses should be eligible for the incentive, regardless of legal structure and size, to prevent distortions around investment decisions and the choice of business structure.
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Under the proposals, businesses would be eligible for the incentive if they:
- are located in New Zealand and carry out R&D in New Zealand;
- satisfy the 'tax test" of being in business i.e. they are carrying out a profession, trade, manufacturing, or undertaking with an intention to make a profit;
- are claiming for R&D expenditure that relates to their business or intended business;
- have control over the R&D activities;
- bear the financial risk of the R&D activities;
- effectively own the results of the R&D.
The scheme would be restricted to activities that resolve scientific or technological uncertainty. The discussion paper defines R&D as:
- Core activities: those conducted using scientific methods that are performed for the purposes of acquiring new knowledge or creating new or improved materials, products, devices, processes, or services, and that are intended to advance science or technology through the resolution of scientific or technological uncertainty; or
- Support activities: those that are wholly or mainly for the purpose of, required for, and integral to, the performing of the activities referred to above.
The public consultation on the proposals concluded on 1 June, and the Government intends to introduce legislation to parliament in September 2018.
Another public consultation is likely to occur in late 2018 on the proposals, before legislation is made law and guidance material is published in early 2019, before roll-out in April 2019.