Taxation (Research and Development Tax Credits) Bill

Taxation (Research and Development Tax Credits) Bill

Government Bill

108—1

Explanatory note

General policy statement

This Bill introduces amendments to the Income Tax Act 2007 and the Tax Administration Act 1994.

The Bill proposes to introduce a research and development tax credit to incentivise businesses to perform research and development.

The Government’s goal is to increase the amount of research and development undertaken in New Zealand. By providing a tax credit, the Government will lower the cost to businesses of performing research and development. This will create an incentive for firms already performing research and development to do more, and for other firms to start undertaking research and development.

The Bill sets out the conditions which need to be satisfied for a firm to receive a tax credit. It also clarifies the circumstances and types of activities that will not be eligible for the tax credit.

The corollary of providing an incentive for research and development is ensuring that firms that are not performing research and development do not receive the tax credit. The Bill therefore establishes boundaries around categories of expenditure so that routine business-as-usual expenditure does not qualify for the tax credit.

The main policy measures have been developed in accordance with the Generic Tax Policy Process (GTPP). This is a very open and interactive process between the public and private sectors, which helps ensure that tax and social policy changes are well thought through. This process is designed to ensure better, more effective policy development through early consideration of all aspects, and likely impacts, of proposals, and increased opportunities for public consultation.

The GTPP means that major tax initiatives are subject to public scrutiny at all stages of their development. In the context of the R&D tax credit, this has allowed Inland Revenue, the Ministry of Business, Innovation, and Employment, and Treasury officials to develop more practical options for reform by drawing on information provided by the private sector and the people who will be affected.

The final stage is a post-implementation review of new legislation, and identification of remedial issues that need correcting for the new legislation to have its intended effect. Further information on the GTPP can be found at: http://taxpolicy.ird.govt.nz/how-we-develop-tax-policy.

The following is a brief summary of the policy measures and features contained in this Bill. A comprehensive explanation of all the policy items is included in a commentary on the Bill that is available at: http://taxpolicy.ird.govt.nz/publications/2018-commentary-rdtc-bill/overview.

Defining an eligible person

The Bill proposes requirements for who is eligible for a research and development tax credit. The key requirements are that a person—

  • performs a core research and development activity in New Zealand, or a contractor performs it on their behalf; and

  • carries on a business through a fixed establishment in New Zealand; and

  • has day-to-day management control over the research and development activities.

It is also proposed that the person must also satisfy one of the following to be eligible:

  • the person owns the results of the R&D activities; or

  • the person is able to use the results of the R&D activities for no further consideration; or

  • a company in the person’s corporate group owns the activities, and the company is resident in a jurisdiction with which New Zealand has a double tax agreement.

Defining research and development

A core research and development activity is proposed to be an activity that—

  • is conducted using a systematic approach; and

  • has the purpose of creating something new; and

  • has the purpose of resolving scientific or technological uncertainty.

Activities that are not a core activity will only be eligible if they are in support of a core activity. Some activities have been explicitly excluded from being a core or supporting activity.

Calculating the tax credit

The tax credit is proposed to operate with a threshold and a cap. In general, to be eligible for a tax credit, the Bill stipulates that a person must spend at least $50,000 on research and development in a given year. The maximum amount of expenditure that is eligible for a tax credit is $120 million, unless a person has obtained the Commissioner’s approval to exceed the cap.

The tax credit that a person receives is equal to 15% of their eligible expenditure. Eligible expenditure is expenditure incurred on an R&D activity, and includes things like employee salaries, consumables used in the R&D process and depreciation of assets used in the R&D.

Where expenditure is incurred on an R&D activity performed in the course of commercial production, the amount that may be claimed is limited to the additional expenditure incurred because of that R&D activity.

Primarily, the tax credit is only available for expenditure on research and development that occurs in New Zealand. Nevertheless, up to 10% of an R&D claim can be for expenditure incurred on a research and development activity that occurs outside New Zealand.

Orders in Council

The Bill contains schedules of activities that are ineligible for the tax credit, and categories of expenditure that are eligible or ineligible for the tax credit.

In order to ensure that these schedules remain current as the type of research and development changes and to close off problem areas that could impact on the fiscal sustainability of the research and development tax credit, the Bill allows the Governor-General, by Order in Council made on the joint recommendation of the Minister of Revenue and the Minister of Research, Science, and Innovation, to amend the schedules.

Evaluation

The Bill requires the Minister of Research, Science, and Innovation to commission a review of the tax credit every 5 years to evaluate the regime in terms of the delivery of the policy intent, the compliance costs, and the administration of the regime.

Communication by Inland Revenue to other Government departments and agencies

The Bill allows for Inland Revenue to communicate information to relevant people within specific state sector agencies so that they can evaluate, administer, report on, and develop policy for the tax credit.

In-year approval

Starting from 1 April 2020, persons wanting to receive a tax credit will be required to seek approval that their activities meet the eligibility criteria in the year they are undertaking or contracting for those research and development activities. If granted, this approval will be binding on the Commissioner.

A person who expects to spend more than $2 million on research and development, or is part of a group of companies that expects to spend more than $2 million on research and development in a given year, can opt out of the general approval process.

A person who opts out of the general approval process must notify the Commissioner of their intention to opt out, and is required to submit an R&D certificate alongside their R&D supplementary return. An R&D certificate contains confirmation from an R&D certifier on a number of issues, including that a sample of the person’s eligible expenditure calculation was reviewed by the R&D certifier and the sample was calculated consistently with the rules in proposed subpart LY (Research and development tax credits).

Refunding tax credits

When a person’s tax credits are more than their income tax liability, the tax credits are refunded up to a maximum of $255,000, provided the person meets certain criteria, or are carried forward.

Departmental disclosure statement

Inland Revenue and the Ministry of Business, Innovation, and Employment are required to prepare a disclosure statement to assist with the scrutiny of this Bill. The disclosure statement provides access to information about the policy development of the Bill and identifies any significant or unusual legislative features of the Bill.

Regulatory impact assessment

The Ministry of Business, Innovation, and Employment and Inland Revenue produced a regulatory impact assessment on 29 August 2018 to help inform the main policy decisions taken by the Government relating to the contents of this Bill.

Clause by clause analysis

Clause 1 gives the title of the Act.

Clause 2 gives the dates on which the Parts come into force.

Part 1Research and development tax credits: year 1

Amendments to Income Tax Act 2007

Clause 3 gives the date for which the Part applies.

Clause 4 sets out the clauses that affect the Income Tax Act 2007 for the first year of the research and development tax credit.

Clause 5 amends flowchart B4, as a consequence of the ordering rules for use of research and development tax credits.

Clause 6 amends section EE 6, to ensure that exempt people have depreciable property for the purposes of the research and development tax credit.

Clause 7 inserts a new heading and section GB 56, as an anti-avoidance measure, to prevent abuse of the research and development tax credit.

Clause 8 amends section LA 4, to insert an ordering rule for the use of research and development tax credits against income tax liability.

Clause 9 amends section LA 5, to provide for the use of remaining research and development tax credits. If the relevant criteria are met, up to $255,000 of the remaining tax credits may be refunded, or otherwise carried forward if not able to be refunded.

Clause 10 inserts a new subpart LY, to provide a research and development tax credit. New section LY 1 provides for some preliminary matters as well as the substantive entitlement to the tax credit itself. New section LY 2 provides some key terms for the entitlement to the tax credit, namely the definitions of core research and development activity, research and development activity, and supporting research and development activity. New section LY 3 provides the basic criteria for a person’s entitlement to a research and development tax credit. New section LY 4 provides the calculation of the tax credit at the rate of 15 cents for every dollar of total eligible research and development expenditure over the threshold provided, up to the maximum provided. New section LY 5 defines eligible research and development expenditure. New sections LY 6 and LY 7 define, respectively, contracted research and development expenditure and foreign research and development expenditure for the purposes of section LY 5. New section LY 8 provides a rule for the carry forward of unused, unrefunded tax credits. New section LY 9 provides for Orders in Council to vary new schedules 21 and 21B, namely schedules of eligible and ineligible expenditure and of ineligible activities. New section LY 10 provides for a 5-yearly independent evaluation of the effectiveness of the research and development tax credit regime.

Clauses 11 to 20 amend the memorandum account regimes, to ensure that imputation credit accounts and Maori authority credit accounts correctly reflect research and development tax credit entitlements.

Clause 21 amends section YA 1. Subclause (2) inserts a new definition of approved research and development cap, to allow a variable maximum entitlement for the research and development tax credit if the procedure in the Tax Administration Act 1994 is followed. Subclause (3) inserts a new definition of approved research provider, to allow a variable threshold in relation to certain persons and activities if the procedure in the Tax Administration Act 1994 is followed. Subclauses (4) and (5) amend, respectively, the definitions of continuity period and continuity provisions, consequential to the carry forward rule for unused and unrefunded tax credits. Subclause (6) inserts a new definition of core research and development activity, consequential to the definition of core research and development activity in section LY 2. Subclause (7) inserts a new definition of eligible research and development expenditure, consequential to the definition of eligible research and development expenditure in section LY 5. Subclause (8) amends the definition of goods, to allow the use of GST concepts in the research and development tax credit regime. Subclause (9) inserts a new definition of ineligible technology expenditure to ensure that inappropriate expenditure on technology is not counted, under schedule 21B, part B. Subclause (10) inserts a new definition of internal software development expenditure to ensure that inappropriate expenditure on internal software development is not counted, under schedule 21B, part B. Subclauses (11) and (12) amend, respectively, the definitions of minimum market value interest and minimum voting interest, consequential to the carry forward rule for unused and unrefunded tax credits. Subclause (13) inserts a new definition of non-business researcher to provide that some entities without businesses may nevertheless be entitled to the tax credit, and to also exclude some entities from being research and development contractors. Subclause (14) inserts a new definition of research and development activity, consequential to the definition of research and development activity in section LY 2. Subclause (15) inserts a new definition of research and development contractor to ensure that research and development activities carried out on behalf of a person may still qualify for the research and development tax credit. Subclause (16) inserts a new definition of research and development tax credit. Subclause (17) amends the definition of residual income tax, consequential to the use of research and development tax credits to pay tax. Subclause (18) amends the definition of services, to allow the use of GST concepts in the research and development tax credit regime. Subclause (19) inserts a new definition of supporting research and development activity, consequential to the definition of supporting research and development activity in section LY 2.

Clause 22 inserts new schedules 21 and 21B, namely schedules of eligible and ineligible expenditure and of ineligible activities, as criteria for a person’s entitlement to research and development tax credits.

Amendments to Tax Administration Act 1994

Clause 23 sets out the clauses that affect the Tax Administration Act 1994 for the first year of the tax credit.

Clause 24 amends section 3(1). Subclause (2) inserts a new definition of approved research and development cap, to allow a variable maximum entitlement for the research and development tax credit. Subclause (3) inserts a new definition of approved research provider, to allow a variable threshold in relation to certain persons and activities. Subclause (4) amends the definition of proscribed question, to prevent the Commissioner from making binding rulings on questions related to the tax credit.

Clause 25 inserts new heading and section 15ZB, to provide the substantive rules for approved research providers, for the purpose of allowing a variable threshold in relation to certain persons and activities for the research and development tax credit.

Clause 26 amends section 22, to provide appropriate record keeping requirements for the research and development tax credit regime.

Clause 27 inserts new section 33E, to provide a special supplementary research and development tax credit return.

Clause 28 inserts new section 36BE, to provide an electronic format for the supplementary research and development tax credit return, and to provide flexibility in specifying software in relation to the return.

Clause 29 amends section 36C, as a consequential cross-reference matter.

Clause 30 inserts new heading and sections 68CD and 68CE, to provide a process for approving a maximum cap for a person’s eligible research and development expenditure, and to provide the publication of limited details of all people who receive a research and development tax credit.

Clause 31 amends section 81, to allow information flows that appropriately support the administration of the research and development tax credit, and related incentives and advice.

Clause 32 amends section 89DA, to prevent disputes where a taxpayer has failed to file a research and development supplementary return.

Clause 33 amends section 108, to shorten the time-bar for the tax credits, and therefore shorten the period in which back years may be opened up for re-assessment.

Clause 34 repeals section 113D, as a consequential matter.

Clause 35 inserts new section 113E, to provide a single opportunity to open back years for reassessment for research and development tax credits.

Clause 36 amends section 138E, as a consequential cross-reference matter.

Clause 37 amends section 141EC, to strengthen the promoter penalties regime appropriately for the research and development tax credit regime.

Part 2Research and development tax credits: year 2 and subsequent years

Clause 38 gives the date for which the Part applies.

Amendment to Income Tax Act 2007

Clause 39 amends section LY 3 of the Income Tax Act 2007, to introduce, in the second year, pre-approval of people and their research and development activities.

Amendments to Tax Administration Act 1994

Clause 40 sets out the clauses that affect the Tax Administration Act 1994 for the second year and subsequent years of the tax credit.

Clause 41 amends section 3(1). Subclause (2) inserts a new definition of research and development certificate, as part of verifying a person’s research and development activities.

Clause 42 inserts new section 15ZC, to provide a certification process for some people to verify their research and development tax credits. People with greater than $2 million annually eligible research and development expenditure will be required to use certificates, if they choose.

Clause 43 inserts new sections 68CB and 68CC, to provide 2 approval processes for the second year and subsequent years of the research and development tax credit. Broadly, the 2 processes are differentiated by how much annual eligible expenditure a person has. People with less than $2 million annually eligible research and development expenditure have to use section 68CB, and people over $2 million may use section 68CC.

Clause 44 amends section 138E, to ensure that certification and approval (under new sections 15ZC, 68CB and 68CC) are not amenable to the disputes process, as matters left to the discretion of the Commissioner.