New Zealand companies are hiding the amount of money they spend on research and development (R&D) because of the way Inland Revenue handles the deduction.
"I know how much R&D we do and I never report any of it and neither does any other company I know of," says one industry representative who did not wish to be named. He believes official figures on R&D are well off track.
"I would say that the spend in New Zealand is about 20 to 30 times what the government says it is," he says. The reason for the discrepancy is simple: IRD's treatment of money paid into R&D.
"We don't mention any of it to IRD. I just call it something else and write it off."
The Information Technology Advisory Group (ITAG) report into the knowledge-based economy (KBE) points to exactly this phenomenon.
"The requirement to capitalise R&D investment may have a distorting effect and lead to under-reporting of R&D, or it may act as a disincentive to such investments." The report (available from www.knowledge.gen.nz) also outlines the cost of each R&D dollar spent around the world — every dollar invested in R&D in New Zealand costs the company $1.13, compared with countries like Spain (66 cents) or Australia (89 cents).
Simon Carlaw, CEO of the Manufacturers' Fede-ration, agrees.
"It's certainly something that's there, right through from the small and medium-sized companies to the very large and it's a source of considerable frustration for the major players."
Carlaw says companies are tempted to call their R&D work something else and write it off completely instead of declaring it and being forced to capitalise it over a number of years. "Quite a lot of it is adaptation and modification and incremental improvement so they think, 'bugger it, I'm not going to muck about with it'." Carlaw says he hears a lot of companies talking like this.
"Once a month I visit our members throughout the country, usually two or three plants a day, and at least one of them will mention it."
Carlaw thinks it is "an absolute given" that the IRD needs to change its policy.
"There needs to be a comprehensive review of New Zealand taxation across the board and this has to be a component of that." Carlaw would like to see all tax reduced rather than certain areas receiving preferential treatment.
"There needs to be much more pragmatism and certainty in the R&D area. IRD needs to stop mucking about."
Inland Revenue was unavailable for comment as Computerworld went to press.