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When Treasurer Scott Morrison announced his intention to overhaul the current R&D Tax Incentive program in the recent Federal Budget, he cited a need to restore integrity to the current program and to reward those companies that invest heavily in R&D activities. Given the scant detail within the budget papers as to how this objective was going to be achieved, it was initially difficult to assess its impact on a company’s R&D program, despite the Treasurer indicating the changes to the program will come into effect from 1 July 2018.
On Friday, the 29th June, Treasury released its draft R&D legislation, along with a 28-day public comment and consultation period. While the draft legislation has taken the opportunity to address a number of inconsistencies in the current R&D legislation, (primarily around the mismatch in the treatment of feedstock and clawback as a result recent changes in the corporate tax rate), it also became apparent that the proposed changes to the R&D program will primarily benefit subsidiaries of overseas multinationals conducting R&D in Australia, compared to subsidiaries of Australian based multinationals conducting R&D in Australia.
Given how the proposed R&D legislation will deliver an R&D benefit to overseas multinationals that are not available to locally headquartered multinationals, it is difficult to reconcile why, on the one hand, the Federal Government is implementing a suite of legislation to ensure multinationals are paying their ‘fair share’ of tax in Australia (via stringent transfer pricing and related integrity provisions), but at the same time, it is preferentially providing multinationals with a higher R&D Tax benefit that is simply not available to Australian based multinationals conducting R&D in Australia in the same set of circumstances.
The reason for this inequity (and why the proposed changes to the current R&D Tax program will preferentially benefit overseas based multinational groups conducting R&D in Australia, compared to Australian based multinationals) comes down to how the new legislation requires a company to calculate its ‘R&D intensity’.
Read more about how the proposed changes will significantly disadvantage Australian multinational companies conducting R&D in Australia.
Contact our R&D tax experts to find out more about how these proposed changes may impact your business.