This article first appeared in the Sunday Business Post on 6 October 2013 and is reproduced here with their kind permission.
The Department of Finance is reviewing the operation of the R&D tax credit, but the evidence is that it works.
The benefits of fostering research and development (R&D) activity in Ireland are considerable, and in the current economic climate employment is the most welcome of these benefits. But it is not just the employment of those directly engaged in R&D that is important; it is also the employment that is created in manufacturing and services activities that are possible because R&D is undertaken here in Ireland.
It is for this reason that business groups, including the American Chamber, successive governments, academics, IDA Ireland and others, have consistently advocated a competitive environment for R&D investments.
The most prominent has been the R&D tax credit introduced in 2004. Thankfully the credit appears to be doing exactly what was intended. The number of companies claiming the R&D tax credit has increased from 50 in 2004 to about 1,200 in 2010 and since its introduction, multinationals have announced 380 new R&D projects in the country.
So what's next? As it is now ten years since R&D tax credits were first introduced, it is appropriate that the Department of Finance is conducting a review of their operation and effectiveness.
However, it is vital that this exercise is a thorough cost/benefit analysis — and assesses both the costs incurred and benefits which R&D tax credits have delivered. It must also look at the further opportunities to increase R&D by indigenous and multinational companies in this country.
The benefits are clear: a recent industry survey into the efficacy of the credit revealed that R&D jobs had increased by over 800 per cent between 2003 and 2011, helping to increase the total number of jobs created by the surveyed companies to almost 34,000.
It is also worth noting that in the same survey, 71 per cent of foreign firms surveyed said that the R&D tax credit was important or very important to their firm creating new jobs, while 77 per cent said it was important to the retention of jobs in the country. Crucially, 77 per cent said the credit was important or very important in their decision to invest in R&D in Ireland.
As for the costs, which must be examined in today's economy, the latest available data estimates that R&D tax credits granted to indigenous and multinational companies are in the region of £225 million.
What must be understood, however, is that for every euro of tax credit, at least four times this amount was incurred on qualifying R&D activity.
The resultant growth in R&D investment has been phenomenal — over £900 million more was invested on R&D activities in 2010 than in 2003. This is helping Ireland work towards its target of 2 per cent of GDP being spent on R&D.
The £900 million referred to above only accounts for the increase in direct expenditure; it does not take account of the knock-on benefits that the investment in R&D brings. Apart from the manufacturing and services jobs that are possible, performing R&D can generate huge amounts of capital investment, construction jobs and so on. Recent criticism of Ireland's R&D tax credit scheme misses these critical points — the benefits of the scheme are not limited solely to companies conducting the activity; there are many spill-over effects that can be equally beneficial.
From looking at the evidence it is clear that the credit is working. Industry believes that Ireland's R&D tax credit of 25 per cent is competitive and makes a compelling investment case. Therefore in the current review it is critical that the Department of Finance look at ways to make the credit function even more effectively, and encourage more R&D to be undertaken in this country.
One such improvement would be to remove some of the uncertainties about the operation of the credit. Ambiguities do exist as to precisely what can and cannot be included within certain claims. These ambiguities can lead to a difference of opinion between Revenue and claimant companies. Indeed a recent report noted that 26 out of 32 companies agreed a settlement with Revenue in relation to their 2010 R&D credit claim — and this highlights the problem.
Many tax audits result in some element of 'settlement', often as a result of a difference of opinion and not as a result of non-compliance. Avoiding such confusion and ensuring there is as much certainty as possible that once a claim is made it can be sustained clearly has benefits for business and the exchequer alike.
The American Chamber believes a steering group should be appointed which would include representatives from the Revenue Commissioners, the Departments of Finance and of Jobs, Enterprise & Innovation as well as industry participants.
The steering group would engage to consider matters of concern and ambiguity and its establishment would facilitate a more consistent interpretation of certain aspects of the credit
Countries such as Britain, the US, France, Canada, Australia, Singapore and India all have attractive R&D reliefs in place, and competition for mobile R&D investment has never been as intense. Ireland's R&D tax credit, coupled with the low rate of corporation tax, makes Ireland an attractive location for inward investment.
It is important that this continues to be the case and that Ireland continues to remain a competitive place to undertake R&D. That will help our member companies to sustain the 115,000 people currently directly employed by them.
We welcome the Department of Finance's review of the R&D tax credit regime and look forward to continuing to work in an R&D environment that remains best in class.
Anna Scally is chair of the American Chamber Tax Group and a tax partner in KPMG.