Submission on Research and Development Tax Credit Reveiw
American Chamber of Commerce Ireland
Submission to the
Central Expenditure Evaluation Unit
Department of Finance
Potential Enhancements to the Irish Research and Development Tax Credit Review
5th AUGUST 2008
With over 580 US companies employing over 100,000 people directly, it is estimated that a further 225,000 jobs in Irish companies are directly supported by US companies based here. The contribution these companies make to the Revenues of the State in terms of corporation tax, PAYE, Vat and other taxes is considerable. US foreign direct investment has been a diver of innovation and research in the private sector contributing and supporting the national enterprise support infrastructure through the transfer of technology & commercial know-how, skills development, and the injection of an ethos of change, innovation, continuous learning and a global perspective into working life in Ireland
Total US investment in Ireland is $87 billion. Continued investment is crucial to Ireland's current and future success, both as an investor and a significant trading partner.
Ireland continues to face increasing competition from other economies for this investment. The American Chamber of Commerce continues to work with its members to identify how, in the light of our rising cost base & knowledge based competition, Ireland can implement innovative policies and initiatives, which will help us to remain an attractive location for foreign direct investment.
American Chamber of Commerce Ireland
6 Wilton Place
Telephone: +353 1 661 6201
Contact: Brian Cotter, Government Affairs Manager: email@example.com
On balance, we are of the view that a mixed package of incentives is required to increase the profile of Ireland as an R&D location. The regime needs to be as flexible as possible and should be reviewed in the wider context of establishing Ireland as the jurisdiction of choice for the location, creation and trading of intellectual property by US MNC's. The R&D tax credit should also be focussed on helping to retain existing investment in Ireland. A "transportable" credit capable of being set off against, either corporation or payroll taxes, as well as potentially generating cash payments in certain circumstances, would be a welcome initiative in this regard. This would also encourage domestic industry and not just US MNC's.
Summary of Key Tax Enhancements
1. R&D Divisional Level
PAYE / PRSI Credit
Consideration should be given to influencing key R&D decision makers (Project Leaders, etc.) by reducing the project costs through converting the credit from a corporate tax set off to a payroll setoff (PAYE/PRSI).
2. Corporate Level
Start Up Companies
The credit is of very little benefit to companies in start up situations that are loss making and have no corporate tax liability at the current time and for the foreseeable future. A cash refund mechanism akin to other competing jurisdictions, such as the UK, would encourage these start ups to invest in R&D in Ireland.
Subcontracting is a commercial reality for the majority of companies involved in R&D and in some instances, such as small medium enterprises (SME's), it is often a necessity. Increasing the 15% limit for subcontracting to a more realistic level of 25% over the life of the project would be a welcome addition to the regime.
Volume Based System
In order to recognise the long term nature of R&D investment projects it would be beneficial to move from the current incremental system to a volume based system. This would increase the certainty of the tax credit from a business perspective and deliver improvements in the regime as follows:
- Allow companies to be forward looking in terms of winning new R&D projects and not be penalised for any significant prior investment. Effectively each new project won should be seen as incremental in nature.
- Benefit companies with sustained research activity and to facilitate those that may be forced to reduce expenditure levels in more restrictive economic conditions
- Reduce the administration and compliance costs of the incremental system
Rate of Credit
Due to the low Irish corporate tax rate (12.5%) the benefit of the tax credit is diluted when compared to other competing jurisdictions. Therefore there is merit in considering increasing the rate of the credit either across the board or in selective areas / sectors. This can be considered in conjunction with promoting collaboration between entities.
Qualifying Activities / Claim Process
There is merit in clarifying and expanding the interpretation of what qualifies as R&D activities under the regime particularly in areas of economic importance or potential, such as financial services, software development and the life sciences. Consideration should also be given to methods to simplify and streamline the claim process, such as providing SME's with a pro - forma set of documents as an extension of the grant form claims that companies would complete and retain in support of their R&D credit claim in the event of Revenue queries.
3. Personal Level
The key attraction to any R&D regime is the availability of talent. To promote the uptake of fourth level education and to offset the salary sacrifice that this entails, it would be beneficial to consider introducing an element of tax relief for such individuals. This could be structured to assist locking the individuals in to the Irish system.
4. Other Tax Initiatives
We believe that additional tax initiatives are also required to help increase the attractiveness of Ireland as an Intellectual property and R&D location. These initiatives would allow Ireland to compete on the global stage with other locations such as, among others, Switzerland, Singapore, The Netherlands and Hungary. At a minimum the follow issues need to be considered:
- tax write offs on acquiring intellectual property to be available
- improvements to Ireland's foreign tax credit system on royalty income
- Increasing the €5m cap on exempt patent income
- Removing Irish withholding tax on patent royalties.