Xsol chief John Blackham has branded Michael Cullen’s discussion document on tax incentives “a very weak piece of work”.
Its suggestions are unlikely to be of significant benefit to the local ICT industry, he says.
Blackham predicts most of the tax savings will go to the local subsidiaries of large foreign-owned companies and end up overseas. Software Association president Chip Dawson makes the same argument.
Just returned from the UK, Blackham has only recently had a chance to read Cullen’s discussion document in detail and discuss it with fellow IT entrepreneurs.
“The document misses the mark [with respect to IT],” he says
“If the company tax rate was reduced to 30% I doubt the IT sector would see one extra dollar of FDI [foreign direct investment].
“Some local IT companies that are profitable and growing may plough more back into their business, but local IT producers account for less than 10% of the total IT spend so the majority of the tax benefit would go overseas. Overall, the effect on both the economy and the IT sector would be negligible.
“If the government is serious about growing new industry, such as IT, it needs to signal this, so that investment is attracted to the sector,” says Blackman.
New Zealand could positively follow the example of Ireland, which grants companies in rising industries a preferential tax rate, he says.
“If we had a 10% company tax rate, for the first ten years of a company’s life in a new industry, we might see some dollars redirected from property to productive investment,” says Blackman.
Cullen’s proposals also raise the much canvassed possibility of tax rebates for research and development expenditure.
“R&D tax credits may help the IT sector,” Blackham says, “but only marginally and it is a very costly approach because, as with most subsidies, suddenly everyone discovers they are doing R&D.
“Overnight we would probably double the amount of private sector R&D that was being reported, [but] any real change in R&D activity would be negligible since this is generally undertaken for basic commercial reasons (such as growing a business) rather than changes in taxation.
“The NZ IT sector is not going to succeed until the government sends a clear signal that its development is truly a national imperative. With well over 90% of government investment going into our traditional commodity-based industries, and no incentive for foreign (or local) investors to put their money into the IT sector, local entrepreneurs will continue to struggle and the few who make it big will either sell to an overseas buyer (like Navman) or cash out by listing on the Stock Exchange (like Rakon).”
Blackham says he agrees with Opposition finance spokesman John Key, who calls Cullen’s document “a fifth-form paper”.
“A discussion paper should be far more adventurous and consider what other countries have done with tax to stimulate their economies.”
The assumption that tax cuts will be used to boost productivity is naïve, says Blackham, when recent surveys of business directors suggest that their first reaction would be to boost pay rates and dividends.