He said: "Critics are like eunuchs in a harem: they know how it's done, they've seen it done every day, but they're unable to do it themselves." I have listened to the spokesperson of the Labour Party on tax evasion. She used the phrase "tax avoidance" and stated that it is a criminal act. She is a chartered accountant and knows well there is nothing illegal about tax avoidance. However, this did not suit her script so she used the phrase in any case. I note that the Labour Party Members have left the Chamber. They have been disappearing for many a year and I am sure they will continue to do so.
I welcome the opportunity to speak on this Bill and I intend to address two issues in particular. The first concerns the provisions in the Bill that will enhance the innovative capacity of Ireland, thus helping to drive our emergence as a competitive knowledge-based economy, and the second concerns the introduction in the Bill of a stamp duty exemption on transfers of intellectual property.
The emergence of Ireland as Europe's high-growth economy has been a feature of the past decade. This transformation has arisen because of many factors, including a dynamic and youthful population; the pursuit of pragmatic and innovative Government policies; openness to trade, not only in goods and services, but also in new ideas; and an emphasis on education and technological innovation.
Ireland no longer depends for competitiveness on being a low-wage economy and is continuing to make the transition to higher value products and services that allow us to sustain and increase incomes. A key part of this process is to recognise the importance of research and development in sustaining and enhancing competitiveness. We must innovate continuously to make our manufacturing and enterprise base more productive and more efficient.
Ireland's sustained economic growth and prosperity will depend upon establishing a culture of scientific and technological innovation, a high level of research and development and a globally competitive knowledge-based economy. Such repositioning is essential to the provision of sustainable, high quality, well-paid jobs in the future.
The emphasis the Government has placed on research, technological development and innovation is reflected in the greatly increased allocation of €2.5 billion for this purpose in the National Development Plan 2000-2006 compared with €500 million in the 1994-99 plan. We have been making significant progress. Ireland's gross expenditure on research and development has increased from €626 million in 1993 to €1.338 billion in 2001. Despite this substantial real increase, Ireland's gross expenditure on research and development as a proportion of GDP and, more appropriately for Ireland, as a proportion of GNP remains low at 1.17% and 1.39%, respectively.
Heads of State at the Barcelona summit in 2002 agreed a target to increase the EU average spend on research and development from 1.9% of GDP to 3% by 2010, and two thirds of this enhanced expenditure is expected to come, not from Government but from the private sector. This key challenge for the EU will be at the heart of the Lisbon strategy to make the EU the most competitive knowledge-based economy in the world by 2010.
The Barcelona target will require significantly increased spend by the private sector on research and development in Ireland and across the EU. It is critical, therefore, that the fiscal environment encourages private sector investment in research and development and for that reason I strongly welcome and endorse the introduction in this Bill of a research and development tax credit which will stimulate and reward this vital activity in companies.
This new initiative is particularly significant for Ireland as the level of research and development undertaken by business here is low for an economy whose output and exports are dominated by high technology sectors. Private sector spend needs to increase substantially if the major investment under way in the public sector is to be fully effective in its objective of fostering a more knowledge-intensive economy.
Internationally, fiscal incentives in the form of tax credits or enhanced allowances are widely used to stimulate private sector research and development. Eighteen OECD member states offer such incentives and interest in them has grown in recent years as the importance of research and development for long-term economic growth has gained general acceptance.
It is proposed that a 20% tax credit against corporation tax will be available to companies for qualifying research and development expenditure above a 2003 baseline. This baseline will hold for three years and move forward on a rolling annual basis thereafter. Critically, the tax credit will apply not only to basic and applied research but also to experimental development, an activity of significant importance to Irish companies. This proposal will provide an effective incentive to companies to increase research and development and will complement the various direct research and development grant supports which are also available through various agencies of the State.
Technological change and innovation are generally acknowledged to be key drivers of economic growth. Their importance has grown in recent decades as science-based sectors such as ICT and biotechnology have come to occupy a pivotal position in modern economies.
Though innovation takes different forms, formal research and development is at the heart of new product and process development in advanced economies. Business enterprises, particularly large companies, invest substantial resources in research and development because of its contribution to output and productivity growth. Estimates suggest that the rate of return on research and development to the firms undertaking it is in the range of 10% to 15%.
The level of business investment in research and development, however, is sub-optimal for two main reasons. First, research is an inherently risky activity. The extent of that risk increases with the degree of distance between research and its commercial applicability. Second, studies have consistently shown that the social rate of return on research and development significantly exceeds the private rate of return to the company undertaking the research.
The case for the introduction of a tax incentive for research and development in Ireland is based on the need for the Irish economy to make a decisive transition from high-volume, lower-value enterprise to high-value, high-innovation, knowledge-intensive enterprise. Critical to this aim is the need to achieve a substantial increase in the current comparatively low level of business research and development expenditure, particularly among foreign-owned firms in high-tech sectors.
The twin advantages of a plentiful supply of good quality, relatively low-cost labour and a highly-favourable rate of corporation tax that underpinned Ireland's economic advances over the past two decades, will not provide a comparable basis for future growth. Labour supply is not now in surplus; wage levels have risen; and other countries have, or are likely to introduce, corporation tax rates close to the level in this country.
It is widely accepted that the only feasible strategic direction for future policy is to create the conditions that will make possible a sustained shift to higher skill, higher value, and more knowledge-intensive enterprise. While this has long been evident, the scale and rapidity of growth in recent years, and the changes which it has wrought, mean that the transition to an enterprise sector centred on knowledge and innovation must now proceed in a more determined and concerted way.
Under the national development plan, an unprecedented investment has been targeted at programmes and measures designed to strengthen research and innovation capabilities. The technology foresight fund is supporting world-class research in the sciences which underpin the strategic niches of information and communications technologies and biotechnology. The programme for research in third level institutions supports a wide range of research programmes in the higher education sector, including a sizeable capital allocation to address deficiencies in laboratory and other research infrastructure in universities and colleges.
A high-value, high-innovation economy will not be built on the back of these public research and development investments alone. Business research expenditure also needs to rise substantially. In 2001, business expenditure on research and development as a proportion of GDP was 0.8%, just over half the OECD average of 1.56% and one quarter of the best performing country, Sweden, where business expenditure on research and development was 3.3% of GDP.
To sum up, therefore, the introduction of this fiscal incentive for research and development is critically important at this stage in Ireland's economic development. It will help foster a more knowledge-intensive economy in order to provide a sustainable long-term basis for growth in employment and incomes. It will complement public investments in research and development and stimulate the much-needed substantial increase in private investment in research and development, particularly among foreign firms in high-tech sectors whose research intensity lags behind that in other countries. It will help to reduce Ireland's comparative tax disadvantage as a location for internationally mobile research and development and research and development-related investment. It will assist in seeking to attract new overseas investment with a significant research and development element to Ireland which is a priority for the IDA. It will help to encourage existing firms to add strategic functions such as research and development to their Irish operations. Given the competitive pressures facing lower-value activities, this is vital if firms are to progress up the value chain and become more securely embedded here.
I would like now to briefly mention intellectual property. "What is worth copying isprima facie worth protecting.” So said Mr. Justice Peterson in 1916 in what he described as the rough practical test. It has been quoted many times since and captures the essence of what intellectual property law is all about. It is true that intellectual property law also protects what may not be worth copying, in that, for example, a novel will be protected, irrespective of its literary merit. That is certainly just as well, as who could be tasked with this? Rather, it will be the market which will decide whether the protection granted is relevant.
Intellectual property is not easily defined. It is a basket of different rights and as diverse as human ingenuity. In any one product several rights may exist. For example, in the case of a compact disk, the production process may be subject to a patent; the words of the song subject to copyright; a right is also given to the arranger and to the performer; the cover will almost certainly have a trade mark; and a design right may also be involved. The value of these rights can be significant, as evidenced by the success of firms that utilise intellectual property rights in the course of their business. One need only think of the premium price which can be charged for a branded product. There are many examples of this, and it is this extra margin which will give these companies the edge in that they will have the extra resources for research or to strengthen their position on the market place. There is often aquid pro quo for this. For example, a patent will only have a limited life. After that, anyone may use the patent process. In this they will be helped by the fact that when applying for the patent the applicant must disclose the invention clearly enough and completely enough to enable a person skilled in the art to carry out the invention. Rights conferred by a patent do not extend to acts done for experimental purposes. The system, therefore, encourages further development, and with most patents given for incremental improvements in known technology, it has been said that innovation is evolution rather than revolution.
For those engaged in research, an examination of existing publications can often save time and effort. In this regard, the European Commission has estimated that European industries are wasting over €630 billion each year by simply repeating previous efforts, the results of which can be found in published patents.
In Ireland, over the past 12 years or so, we have seen a complete updating of our intellectual property legislation. We had the Patents Act 1992 followed by the Trade Marks Act 1996, the Copyright and Related Rights Act 2000 and the Industrial Designs Act 2001. While much of this legislation is relatively new, further legislative proposals are in preparation.
Stamp duty is only one aspect of the tax system in this country, and obviously it is necessary to look at the system as a whole, to see whether change is justified. We received representations about the application of stamp duty to transactions which I have mentioned. In the UK and in the US stamp duty would not apply to these transactions. We were advised that in many instances, the transfers would incur 9% stamp duty, which is not an insignificant sum. It was clear that it could be seen as a tax on innovation and could well be regarded as a serious impediment to entrepreneurial exploitation of technology. On those grounds, we decided to remove the stamp duty and I believe it will improve the involvement of people in research and development and in the use of innovation. Those two issues are important for the development, continual improvement and upskilling of the economy.