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M/A-COM will

perform

research

and

development

activities regardless of the presence or absence of the credit, but that is not the question. What has happened is that a "tilt" has been created in favor of expanding our effort at a more rapid rate, just as you intended when you enacted the credit. It is too soon yet, and in fact may never be possible to draw a direct correlation between the dollars we recovered through the credit and the additional dollars we spent on R&D. I can, however, offer some specific observations on particular M/A-COM R&D efforts which were affected by the credit.

Since the credit was enacted, M/A-COM has made the decision to intensify its research in gallium arsenide (GaAs), a material which could be used with or in place of silicon in semiconductor components. Within the last year, we have made the commitment to acquire a $20 million facility to house this research and the manufacturing that results, and we will, of course, equip and populate it to the tune of many millions more. The presence of the credit made it much easier for us to commit to this level of effort, even though it represents an outlay far in excess of any we could expect to recover from the credit for years to come.

This program illustrates the effect of the credit on our corporate thinking; it also represents the difficulty of making a direct correlation between the credit and a given

effort. Our GaAs effort is a long-term program.

Decisions we

make today will influence our company for decades to come. With that in mind, it is obvious that no such decision is made solely on the basis of the credit. On the other hand, this investment represents a major risk of assets for us. The willingness of the government to recognize that risk through the credit is no small factor in our willingness to undertake it.

There is one other thing I should mention about GaAs. It represents one of the technological areas in which the United States does not enjoy clear technological superiority over our trading partners, including Japan. Perhaps the safe play for us would be to stay in an area where we already have the head start. By participating vigorously in an area of

international technological competition in which the outcome is not assured, we multiply our risk. We believe that this is precisely what you wanted us to do when you enacted the credit, and we are doing it.

There are other fields in which the United States does

not possess clear technological superiority and in which we are as digital satellite

also pursuing

telecommunications.

research,

such

From M/A-COM's perspective, this is very important to our corporate growth. Because we are competing vigorously in the international market and selling this equipment in other countries, we are benefiting U.S. trade balances. Digital satellite equipment requires sophisticated R&D, and we are committing our funds more readily than we might have done in the absence of the tax credit.

I have spoken at some length of the impact on our
Let me give you

corporate thinking that the credit has provided.

a few figures to illustrate what it has meant to us financially. In fiscal year 1982, based on total sales of $587 million, we had about $15 million of tax-qualified R&D. In 1981 we had about $8.3 million in tax-qualified R&D, and in 1980 we had about $5.7 million. This gave us a tax credit for 1982 of about $1.6 Now, I should qualify these numbers as being approximate; we haven't yet filed our fiscal 1982 tax return. In addition, there is a substantial difference between tax-qualified R&D and the R&D calculated according to financial accounting principles; I will return to this point in a moment.

million.

The $1.6 million tax credit is not a massive sum of money for a company with sales of $587 million. From a profitability standpoint,

however, we consider it to be

significant--nearly 4% of our profits of $41 million, or about 4 cents per share of common stock. Moreover, it is a sign to our management team that the policymakers in Washington do care about stimulating technological development. To us, it is significant that the tax credit has created an atmosphere that is favorable to R&D; in the long run, this is more important than the specific dollar effects.

I would like to address briefly a problem we have encountered in implementing the credit. Our financial people have been uncertain as to the precise value of the credit to our

company because the Department of the Treasury,

accept the Financial Accounting Standards Board

rather than definition of

understood.

The

are not using the

R&D, has chosen to create a new definition of its own for tax purposes. While we understand and are sympathetic to Treasury's concerns that the credit not be abused, it is our feeling that we are liable to a long series of audit disputes and uncertainty before this. "new" definition is fully difficulties are not so great for us that we credit; however, I suspect that a number of smaller companies, who do not have our expertise, will experience proportionately greater difficulty. Indeed, because of the increased risk of IRS dispute, some smaller companies may choose the conservative approach and not make full use of the credit.

Mr. Chairman, my point up to now has been to demonstrate that the R&D tax credit has been doing exactly what Congress wanted it to do; it is stimulating manufacturing companies like M/A-COM to redouble our research and development efforts. Our message to you is simple: in order to retain and enhance this atmosphere that encourages corporate R&D, we suggest that you make the credit a permanent part of the tax code.

Research and development

activities are long term

projects and can best prosper in an environment of long term stability. Our gallium arsenide research, which I discussed above, is a long term effort.

Virtually all of our R&D programs

are of the same nature; long term commitments of corporate

resources to ventures with uncertain futures. The R&D tax credit is due to expire in less than three years, which makes long term planning difficult.

If the R&D tax credit is allowed to expire, the positive influence that has developed will evaporate and we are afraid that a negative environment will develop. Top corporate executives will perceive that the Federal Government made a conscious decision to take away a useful incentive in spite of its demonstrated value. The result could be a decreasing rate of R&D expenditures that would be contrary to the best interests of U.S. industrial policy and national security.

It is far too soon to quantify the full effect of the credit. The incentive was enacted in 1981 but the implementing regulations were not issued for 17 months after enactment. It is not possible to quantify the cost/benefit relationship at this point in time, and it may never be possible to do so. It is surely not possible to use the data from 1982 tax returns to argue that the cost (in lost revenue) outweighs the public benefits. To the contrary, we believe that the public policy benefits of the tax credit outweigh the revenue costs.

In sum, Mr. Chairman, we believe that the R&D tax credit is an invitation from the Federal government to companies like ours to reinvest our revenues in America's industrial future through research and development. invitation, and ask only that you continue it by enacting S.738.

We have

accepted that

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