​Tax cuts might force Cochlear to send R&D overseas

Sydney-based biotechnology firm Cochlear Limited suggested to shareholders on Tuesday that it may be shuttering its research and development (R&D) activities in Australia as a result of recent tax cuts made by the federal government.

What concerns Cochlear chairman Rick Holliday-Smith is the reduction of the R&D incentives at a time when many other countries appear to be increasing incentives to attract R&D investment.

"Recent changes announced as part of the omnibus bill, as well as further proposed changes, will materially reduce the R&D tax benefits to Cochlear in Australia," Holliday-Smith said.

"There may be little or no apparent impact from changes to taxation policy in the first year, but over time we may see the loss of an increasing amount of research investments to overseas jurisdictions.

"Unfortunately, the impact of these decisions can only be fully understood over the longer-term."

Speaking at the company's annual general meeting in Sydney, Holliday-Smith said that historically, Cochlear has benefited from the government's R&D tax concession, generating until recently an annual tax benefit in the ballpark of AU$10 million.

He said the incentive originally aimed to encourage globally mobile, export focused, advanced manufacturing companies like Cochlear to stay in Australia, noting that it has been a contributing factor to Cochlear's decision to conduct the majority of its research locally.

In the 2016 financial year, Cochlear reported net profit of AU$189 million, which was an increase of 30 percent year-on-year. Cochlear's R&D spend also increased to AU$143 million, representing approximately 12 percent of its sales revenue.

"Cochlear continues to demonstrate its commitment to being the technology leader in our industry with ongoing investment in R&D," Holliday-Smith said. "Our aim is to improve hearing outcomes and expand the indications for implantable solutions so our recipients can have the quality of life they expect."

According to Holliday-Smith, the majority of the company's R&D occurs in Australia; however as a consequence, Cochlear pays over 75 percent of its taxes in Australia, despite 95 of its revenue generated elsewhere.

"Importantly, the valuable Intellectual Property, or IP, generated from this R&D is largely owned in Australia. And by conducting these activities here, we are also providing a training ground for leaders of the next generation of innovators, especially in the field of medical technology," Holliday-Smith added.

"Cochlear will continue to vigorously promote the maintenance of a globally competitive R&D tax concession regime in Australia. We believe it is in the best interests of Cochlear and Australia."

Holliday-Smith believes Australia needs leaders in export-oriented businesses, and should be encouraging research-oriented companies like Cochlear that are involved in advanced manufacturing.

A review into the R&D Tax Incentive recommended last month that the federal government focus more on encouraging research or it will impact the program's long-term continuation.

The review was undertaken by Chair of Innovation Australia Bill Ferris, Australia's Chief Scientist Alan Finkel, and Secretary to the Treasury John Fraser, after Prime Minister Malcolm Turnbull tasked the trio with "identifying opportunities to improve the effectiveness and integrity of the R&D Tax Incentive, including by sharpening its focus on encouraging additional R&D spending".

The review into the program that handed out AU$2.95 billion in 2013-14 found that the R&D Tax Incentive falls short of meeting its stated objectives of "additionality and spillovers", and that it could do more to encourage additional research and research spillovers into other sectors.

To Holliday-Smith, one particular comment within the report speaks to the Cochlear brand: "R&D activities are a key driving force of productivity and economic growth".

"We agree, which is why we continue to be active in the public debate around proposed changes to incentives," he said.

The R&D Tax Incentive allows companies to claim a tax break for the money they spend on internal R&D, and in February last year, Parliament passed legislation that limits the amount for which companies can claim R&D tax breaks to AU$100 million.

In March last year, the Senate then voted against the Tax & Superannuation Laws (2014 Measures No. 5) Bill 2014, which included a proposal to introduce a 1.5 percent cut to the current R&D tax offset rates of 40 percent and 45 percent from July 1, 2014.