« PreviousContinue »
tumors with a heating process, eliminating in many cases the need for surgery. The potential for life-saving represented by these two devices is enormous.
These are but a few examples of the results of our intense R&D effort. Without going into detail, other such products of our most recent research include encryption technology for voice and data, which has both national security and commercial applications; video scrambling equipment for secure satellite distribution of video programming; coaxial cable for information transmission with increased capacity and improved installation capabilities; and satellite telecommunications technology which enables which enables a widely diverse group of people to share a limited transmission capacity whenever they wish, thereby bringing the cost of these services within reach of a vast number
Mr. Chairman, we appreciate that the question before the committee is: "Does the R&D tax credit work? Does it encourage companies to undertake research and development efforts which it would not otherwise undertake?" The answer from M/A-COM is a resounding "Yes!!"
The credit has been in effect for only two years; yet in that time it has become embedded in the thinking of our company's senior management, and has had the effect of
heightening the corporate priority for 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.
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
From M/A-COM's perspective, this is very
important to our corporate
I have spoken at some length of the impact on our
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 million. Now, I should qualify these numbers as being approximate; we haven't yet filed our fiscal 1982 tax return. 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.
The $1.6 million tax credit is not a massive sum of money for a company with sales of $587 million. 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, rather than accept the Financial Accounting Standards Board definition of 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 a long series of audit disputes and uncertainty before this. "new" definition is fully understood. The difficulties are not so great for us that we are not using the 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