Ireland has a competitive tax offering for incentivising companies to undertake research and development (“R&D”) activities on these shores. R&D is recognised as a key input to innovation, which in turn is a key driver of productivity and long-run economic growth. Stimulating additional R&D is an important component of the Government’s strategy which seeks to make Ireland a global innovation leader.
The R&D tax credit is a key tool to help the Government achieve its objective. It was first introduced in 2004 and has been enhanced on a number of occasions since then. These enhancements have included the rate increase from 20% to 25% and the availability of the credit as a cash refund to companies who are not in a corporation tax paying position. This latter improvement was a significant boost to Ireland’s many SMEs who previously may not have been able to avail of the R&D tax credit.
The R&D tax credit has been very successful at incentivising companies to undertake R&D activity. However, recognising the importance of research, development and innovation for Ireland’s economy, the Government introduced a new incentive in Finance Act 2015 for companies to commercialise certain intellectual property (“IP”). The Knowledge Development Box (“KDB”), reduces the amount of corporation tax paid on income earned from the exploitation of IP developed as a result of R&D activity (as defined by the R&D tax credit rules) undertaken in Ireland. Depending on the fact pattern, it can result in a 6.25% effective corporate tax rate.
Although there were no changes to either the R&D tax credit or KDB regimes in Budget 2019, it is important in the context of the international tax environment (e.g. Brexit, US Tax Reform) that Ireland seeks to ensure that our innovation tax incentives foster and reward innovation. Over the next 12 months we expect that the Department of Finance (“DoF”) will undertake a review of the R&D tax credit regime and that Revenue will provide further guidance to clarify various matters relating to how the reliefs operate. These ongoing reviews will help ensure that the Government’s objectives are met.
The DoF undertook a review of the effectiveness of Ireland’s R&D tax credit regime in both 2013 and 2016, and are expected to do so again in 2019 as part of their policy to review certain reliefs every three years.
The Review of Ireland’s R&D tax credit 2013, published by the DoF, found that the Irish R&D tax credit is among the “best in class” internationally. In terms of the competitiveness of the regime, the credit was found to at least match the international benchmarks, and is among the most favourable in respect of certain elements.
The Report on Tax Expenditures published by the DoF in October 2016 concluded that the R&D tax credit in its current form can be considered a “reasonably successful” policy tool which stimulates additional R&D (60% of the R&D undertaken in Ireland was linked to the existence of the R&D tax credit). It also determined that for every €1 forgone to the State, an additional €2.40 is spend by companies on R&D.
The DoF’s planned cyclical review is important to ensure that the R&D tax credit is still achieving its primary objective of encouraging companies to undertake R&D in Ireland. The review will also identify areas where the regime can be improved or more specifically targeted. For example, in the 2016 DoF report, one area that was flagged was to consider how R&D could be encouraged in younger firms. A specific SME regime would go some way to helping achieve this.
The latest information available from Revenue highlights the success of the R&D tax credit regime. The State provided funding, via the R&D tax credit, of €708m in 2015 and €674m in 2016, on qualifying annual R&D expenditure of circa €2.8billion. The number of claimant companies is consistent each year, in or around 1,500 – 1,600 for the last three years. Of these, circa 90% would employ less than 250 people in Ireland, placing many in the SME category. In terms of the size of claims being made, in 2016 92% of companies claimed less that €500k of tax credit.
Interestingly, in 2016, a greater proportion of the R&D tax credit was set off against corporation tax liabilities (65% v 50% in 2015 and 41% in 2014), rather than being claimed under the cash refund mechanism. This highlights that post-recession, companies are continuing to return to profitability and is in line with the increase in corporation tax receipts that the country has experienced in recent years.
New R&D tax credit guidelines are expected to be published later this year. We welcome the additional guidance as it should provide further clarity in respect of Revenue’s view on certain matters. One of the most important aspects of the R&D tax credit regime for claimant companies, perhaps ranking above the rate of relief, is certainty that the amount claimed will not be clawed back under audit.
We understand that Revenue will include sector specific guidance in the updated R&D tax credit guidelines, something which we have worked on with Revenue. It is expected that the first sector for which specific guidance will be provided is Agri-Food, followed by ICT.
The UK will clearly have more scope to make improvements to their overall tax regime post Brexit, and we can expect that they will seek to compete more aggressively for Foreign Direct Investment. It has a very competitive R&D regime for SME’s, with a headline rate more than comparable to Ireland’s regime (which provides for 25% relief). It also enables non tax paying companies to claim cash back, similar to our own regime. There is also a specific large company regime in the UK which is less attractive, providing for a net tax benefit of circa 10%.
One of the improvements we have believed for some time would be advantageous to SME’s in Ireland, is the introduction of a specific SME regime. This regime should, amongst other things, allow SME’s to receive the cash refunds in one go, rather than waiting for three years for these to be received, as is currently the case. We believe that a simple change such as this, while having little real impact on the overall cost of the R&D tax credit to the State, would provide a significant boost to SMEs in terms of funding and cashflow. Although Budget 2019 did not facilitate any such measure, we would hope to see it in the near future to help encourage more R&D in younger, and smaller, companies.
The introduction of new tax rules by the Trump Administration in the US has created a lot of headlines over the last 12 months. While questions have been raised about whether these new tax rules would make Ireland a less attractive place for US multinationals to establish operations, the flow of new investment into Ireland continues. The IDA had a record level of new investments into Ireland in 2017, and 2018 is trending higher again. Ireland has much more to offer than its 12.5% corporation tax rate; it is developing as a genuine tech hub and provides a gateway into Europe for US companies which the UK may not be able to provide post Brexit.
The reliefs that Ireland offer, such as the R&D tax credit and the KDB, will continue to be available to US MNCs even following US Tax Reform.
We fully expect that the DoF review of the R&D tax credit regime in 2019 will yet again highlight that Ireland’s R&D regime is best in class internationally, and incentivises companies to locate and retain their R&D on these shores. Anecdotal evidence from our multinational client companies investing in Ireland is that they compete on an international scale within their own organisation to located R&D activity here. Continuing the theme of incrementally improving the R&D tax credit is as important now as ever, as is looking at how to get the most out of the KDB regime.
The R&D tax credit, along with the KDB and the 12.5% tax rate are the three pillars of Ireland’s corporation tax offering to foster and reward innovation. We must ensure that we continue to compete at the top table in respect of each of these.
This article appeared in The Sunday Business Post and is reproduced here with their kind permission.