STATEMENT OF JOHN S. NOLAN, ESQ., MILLER & CHEVALIER, WASHINGTON, DC, ON BEHALF OF THE MOTOR VEHICLE MANUFACTURERS ASSOCIATION, WASHINGTON, DC Mr. NOLAN. I am John S. Nolan of Miller & Chevalier, Chartered, Washington, DC. I appear for the Motor Vehicle Manufacturers Association, representing the principal U.S. manufacturers of automobiles, trucks, and buses. The domestic automotive industry is currently engaged in massive research and development to improve the functional, safety, environmental, fuel efficiency, and other characteristics of automotive products. We are spending $4.4 billion annually on research and development, constituting about 16 percent of all non-Government research and development in the United States. This research is absolutely essential to incorporate new technological developments into automotive products to achieve safety, environmental fuel efficiency, and other such improvements to remain competitive with foreign automotive producers whose research is subsidized by their governments, and to meet increasingly stringent performance standards required by Government regulation. This domestic automotive research involves substantial risk and is precisely the kind of activity that the research and experimental tax credit is designed to sponsor. We feel that while S. 2165 makes significant progress toward clarifying the scope of "qualified research" for purposes of the tax credit, some modest additions to the proposed statutory language are necessary. Our changes would insure that the credit applies if the principal purpose of the research is to improve the function, safety, performance, reliability, quality, or cost of the product or the production process as opposed to style, taste, cosmetic, or seasonal design considerations. We would also incorporate a safe harbor rule that research or experimentation to comply with Government regulation as to environmental, energy efficiency, safety, noise, or similar standards would qualify for the credit. If these and other minor changes we suggest (which are specifically described in my written statement), are made, we fully support enactment of S. 2165. Mr. Chairman, the Treasury position that the credit should be confined to truly innovative, highly risky research, and should not extend to development activities, is not realistic. It is impossible in a tax statute to draw these kinds of distinctions. The IRS cannot administer the kind of subjective, uncertain, case-by-case "factor" approaches that are suggested by the Treasury. The result will be that the credit will be denied on audit in virtually every case. Litigation will result, and there will be no certainty as to the availability of the credit, and its benefits will be lost. Furthermore, this approach is self-defeating. It is as important as a practical matter to apply the fruits of research to consumer products as it is to conduct the research in the first place. The line should be drawn as drawn in S. 2165 as we suggest at activities designed to improve the functional characteristics of products, not at some vague and subjective test of riskiness. Applied research and development can be just as risky and just as important as basic re search. Both are equally necessary to keep America moving forward. Mr. Chairman, the modest changes to S. 2165 that we have suggested will ensure that we each receive the support that the bill intends on an evenhanded basis. Thank you very much. Senator CHAFEE. Thank you, Mr. Nolan. Mr. Howard. [The prepared statement follows:] STATEMENT OF JOHN S. NOLAN ON BEHALF OF MOTOR VEHICLE MANUFACTURERS ASSOCIATION REGARDING THE DEFINITION OF QUALIFIED RESEARCH IN S. 2165 SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT UNITED STATES SENATE COMMITTEE ON FINANCE I am John S. Nolan of Miller & Chevalier, Chartered, Washington, D.C. I appear on behalf of the Motor Vehicle Manufacturers Association of the United States, Inc. (MVMA), a trade association comprising the principal manu1 facturers of domestic automobiles, trucks, and buses. The MVMA represents its members in matters that affect the interests and welfare of the motor vehicle manufacturing industry (hereinafter automotive industry). For the reasons discussed below, the tax treatment of research and development expenses is important to the automotive industry, which currently accounts for approximately 16 percent of nongovernment industrial research and development expenditures in the United States. The MVMA agrees that the provision (section 102) in S. 2165 which defines "qualified research, with respect to amounts eligible for treatment as tax credits under section 44F, would be an improvement over the existing 1 The member companies of MVMA are: American Motors Corporation; Chrysler Corporation; Ford Motor Company; General Motors Corporation; International Harvester Company; M.A. N. Truck & Bus Corporation; PACCAR Inc.; Volkswagen of America, Inc.; Volvo North America Corporation. 36-078 0-84--26 statutory language, assuming that a few changes to the Bill necessary to prevent harmful discrimination against the automotive industry are made. If such changes are made, MVMA would support the provision (section 101) in S. 2165 which makes permanent the tax credit for qualified research expenses provided in section 44F, Internal Revenue Code of 1954. S. 2165 - It is entirely consistent with the purpose of to enhance United States industries' productivity - that the Bill and international competitive position Description of Research and Development The Automotive Industry's Role in the Economy The automotive industry has traditionally played a vital role in the nation's economy. Output of cars and trucks in the United States represented 3.8 percent of the Gross National Product in 1983, down from a recent high of 5.1 percent in 1977. In 1982, automotive manufacturers |