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Review Recommends Changes To Ireland's Patent Royalty Tax Exemption Scheme

by Jason Gorringe, Tax-News.com, London

10 July 2007


The Goodbody review of Ireland's Patent Royalty Tax Exemption scheme has recommended to government a number of changes that will encourage more research and development activity, and cut down on abuse of the system by some firms.

The review, which was conducted by Goodbody Economic Consultants and published by the Finance Department last week, concluded that R&D spending in Ireland's business sector is low by international standards. Tax based supports are largely directed at the business sector, and it is that sector which lags behind competitor countries in terms of R&D spending, the report stated.

"The Irish R&D tax credit scheme is less generous than that of some of Ireland’s European competitors," Goodbody's report explained, continuing: "In this context, the Patent Royalty Tax Exemption scheme must be regarded as (a) substantial component of Irish tax-based support for R&D and one which helps raise the level of R&D tax-based supports in Ireland to that available from such supports across the EU. It should be noted that in addition to such R&D tax based supports, firms in the R&D sector benefit from the low Irish corporate tax rate."

The Patent Income Tax Exemption Scheme has been in place for over 30 years, and was conceived to encourage R&D in Ireland and to stimulate inventive activity. However, early in 2006, the EU Commission sent the Department of Finance a formal notice of infringement, indicating that the restriction in the Scheme which requires that the research leading to the “qualifying patent” be carried out in Ireland, is contrary to EU law. The Finance Department then announced the review of the patent exemption relief in terms of its efficiency and effectiveness, and in the light of the Commission’s concerns.

According to the report, there is international evidence to support the view that industry does respond positively to R&D tax incentivisation. "The cost-benefit return to tax credit schemes is substantially positive: tax credit schemes return an R&D spending of up to twice their cost," it stated.

The report noted that the total impact of the Patent Royalty Tax Exemption scheme in R&D terms was valued at somewhere between EUR86m and EUR114m in 2004. The total cost of the Scheme in that year was estimated at EUR62 to EUR67m; thus the benefit in terms of R&D impacts to firms alone exceeds the Scheme's cost. "When account is taken of the fact that the Scheme also provides incentives to individual inventors and the third level education sector, it is clear that the benefits of the Scheme exceed the costs by some margin," the report observed.

However, the report also said that the Scheme is "open to some manipulation" by firms that apply for an incremental patent on the basis of very little R&D activity in Ireland, and which then succeed in achieving high levels of patent income and tax exemption. "This raises the issue as to whether the Scheme should be reformed to link qualifying income to the scale of the commitment of the firm to R&D."

The Goodbody review recommended that the Scheme be reformed so that eligibility for the Scheme is not based on R&D activity in Ireland, but is expanded to embrace R&D activity in countries belonging to the European Economic Area (EEA). In these circumstances, there would be a need to limit the tax gain to firms. Additionally, the report expounded on the advantages of linking qualifying income under the Scheme to R&D spending by the firm.

"A cap on qualifying income would be the simplest approach to limiting the tax gain to firms, while extending qualifying income to include R&D conducted outside the State," the report suggested.

"A variant on this approach would also link qualifying income to R&D spending by the firm, and qualifying income would then be the lesser of the cap or the R&D spending," it added.

A comprehensive report in our Intelligence Report series looking at Tax-Effective Global Manufacturing and Financing Structures is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report8.asp

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