Industry,

For U.S. industry to remain competitive, it is important to address both the education and the research problem. together with the academic community, must take necessary steps to assure a continuous flow of professional skills and a continuous investment in research and development.

R&D Incentives (S. 738, S. 654)

From 1973 through 1981 IBM's increase in R&D averaged about 10% per year. In 1982 IBM's increase in R&D over 1981 was greater than 25%, an increase in the growth rate of 150%. We estimate that in 1983 our increase over 1982 will again be about 25%. Though we may not continue to increase R&D at this rate on into the future, IBM has, as is evident in other high technology companies, overcome a "communication lag" between our financial management and our R&D operations. Financial management has made it clear that there are incentives for increasing R&D and that we are now operating in a different environment and are prepared to make additional long term commitments. We need the certainty now that these incentives will be available in the future.

The incentive of Internal Revenue Code Section 44F, Credit for Increasing Research Activities, appropriately provides a stimulant for increasing R&D investments. It is an effective incentive and we urge that it be made permanent at the earliest possible time by Congress.

It is widely recognized that R&D involves high risk.

Specific

high risk efforts require nominal or seed money to begin with. The bulk of the R&D funds will be spent in the later half of the project's life. Typically for IBM only 10% to 15% of the total R&D occurs during the first 2 years of the R&D effort which normally last anywhere from 4 to 10 years. Because the current R&D credit will terminate in 2 years, IBM would be more responsive to undertake additional R&D efforts if the credit were made permanent so that a majority of R&D expenditures would be creditable in 1986 and beyond.

The R&D tax credit is an effective tax policy measure to address concerns about the health of our nation's high technology industries and our new and middle size innovative companies. These high technology and innovative companies will be the keystone of efforts to maintain the U.S. in a leadership position in world trade, a position on which our future economic prosperity depends. The tax credit also acts to offset other recent tax measures enacted into our income tax system that have put a higher burden per dollar of income on companies like IBM. The prime example is the Accelerated Cost Recovery System (ACRS) impact on computer equipment. IBM's experience prior to 1981, showed that the true useful life of our computer equipment was five years or less. Under the law applicable in those years, users could write off this equipment under the 200% declining balance

method (40% the first year, 24% the second year, 16.4% the third year, and 9.8% in the fourth and fifth years). In 1981, Congress enacted the ACRS which was designed greatly to speed up cost recovery. For many industries, the effect was dramatically favorable. However, in the case of assets which had established five-year lives or less, there was no shortening of recovery period and the rate of deductions was limited to 150% declining balance with a half year convention (i.e., 15% in the first year, 22% in the second year, and 21% in each of the succeeding years). The 1981 Act contained provisions that would in effect restore the 200% declining balance method by 1986. However, with 1982 came a search for greater revenues, and this promised return to 200% declining balance was repealed (and 5% was knocked off the depreciation base in connection with the investment tax credit). The end result is that users of high technology. equipment were distinctly worse off. With the expiration of the R&D tax credit, the result will be a disincentive for high technology industries.

The recent proposed Treasury Regulations (published January 21, 1983) on the R&D tax credit are severely discriminatory against IBM by denying generally development of computer software as qualifying expenditures.

Congress did not

intend by the passage of the tax incentive designed to encourage private research and development to have the perverse effect of restricting the category of qualifying

expenditures.

If the proposed Treasury Regulations were adopted in their present form, there can be no doubt that developers of computer software will be significantly worse off than they were before 1981. Ironically, the proposed Treasury Regulations not only restrict research in one of the most promising industries for increasing productivity and trade in the U.S. today, they single out for restriction what is probably the most important ingredient for research and development--computer software. Congress specifically addressed the status of the cost of developing computer software in the 1981 legislative history of Section 44F by including the statment that "expenditures which otherwise would qualify for the new credit are not to be disqualified solely because such costs are incurred in developing computer 'software', rather than in developing 'hardware'."

We

understand that Treasury has reconsidered this discriminatory position and will honor the intent of Congress. The Senate Finance Committee will have to stay vigilant to assure that the intent of Congress is carried out and the early enactment of S. 738 will be important to alleviate these disincentives for the computer industry R&D efforts.

For these reasons, the top priority for Congress in encouraging future R&D investment is to make the credit which expires December 31, 1985 permanent now.

The requirement of Internal Revenue Code Section 861 and the 1977 Treasury Department Regulations promulgated thereunder requiring allocation of R&D expenditures in the U.S. against foreign source income serves as both a disincentive for increasing foreign sales and as an incentive for placing R&D overseas at a time when U.S. interests call for exactly the opposite effect. The Congress should make permanent the

correction of these problems by continuing the deduction of

all U.S. research and experimental expenditures against U.S. source income.

Education Development Assistance (S. 1194, S. 1195)

The supply of human resources is necessary for IBM's growth

and competitiveness.

Our employees are of utmost importance

to ensure the success of our company.

We are highly dependent on a vital, intellectually competitive university research and education community for both human

resources and research.

Unfortunately, it is precisely in

our field of activity that the universities have the greatest difficulty responding due to lack of resources. As a result, there are critical professional skill shortages and a need to revitalize exploratory, non-propietary research in the universities and national laboratories in the basic disciplines of mathematic, physical and computer science and engineering.

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