Amendments Nos. 33 to 37, inclusive, are alternatives to amendment No. 32 and amendment No. 38 is related. We will take amendments Nos. 32 to 38, inclusive, together. Is that agreed? Agreed.
SECTION 27.
Chairman
I move amendment No. 32:
In page 50, subsection (2), lines 47 and 48, and in page 51, lines 1 to 56, and in page 52, lines 1 to 55, and in page 53, lines 1 to 41, to delete paragraph (b).
This section relates to patent royalties, which must be one of the most complicated areas of law. I do not know if Deputy McDowell specialises in that area but I am sure some senior counsel specialise in it. The issue of patents, royalties and copyrights has astounded me for many years. Fortunately, I learnt a little more about copyright when I was Minister for Trade and Tourism because it was discussed at various EC Council meetings in the context of prospective directives. I used to get quite confused and the experience did me no good.
The Minister is proposing fundamental changes in this section in order to close off obvious loopholes. I have no objection to that. Some years ago it became obvious that the directors of financial institutions were getting part of their income tax free by using those loopholes. I recognise how difficult it is to close off loopholes while giving protection to people with copyrights, patents and royalties. It is a mind boggling exercise and I do not envy the officials of the Department of Finance and the Revenue Commissioners who have that task. I do not object to obvious loopholes being closed, although when they were there the taxpayer was entitled to avail of them. The loopholes are an ongoing battle between the Revenue Commissioners and the taxpayer and that is the proper way to do business.
As I understand it, after 1992 it was changed to only manufacturing or that one must be from an unconnected party. On reading the Bill and getting advice on it — I am not 100 per cent clear about the advice — the price for the idea must be at arm's length and the dividend cannot be greater than the amount of money spent at R&D level. Could the Minister explain the section further? It has been brought to my attention that there is a part of the Bill which provides that the idea must be radical and innovative. They are two subjective concepts. What I might regard as being radical and innovative might not be regarded as such by the Minister. I can offer an example. Some of the officials have books of yellow stickers on which they write messages to Deputies, etc. I understand that this process began when a person in a certain institution spilled a weak adhesive on some sheets of paper upon which other members of staff began to write messages. I believe this development should qualify for a patent royalty under the legislation. However, if it were brought to the attention of the Patents Office, it would be deemed not to be radical or innovative. The phraseology used in this section is quite subjective and I am concerned about its implications.
Chairman
A number of amendments are being taken together. For the purposes of clarification, are there two paragraphs (b) which relate to section 27(2)? I may be incorrect but there seems to be a problem with the drafting of the section.
Yes, there is a subparagraph which should be annotated by means of Roman numerals.
Chairman
Section 27(2)(b) is on page 50 of the Bill and again on page 52.
The annotation at the top of page 51 is (3B)(a).
That is an insertion and is denoted by inverted commas.
Does that have a specific purpose?
It means that it is being placed in another Act.
Chairman
No. Page 52 contains a paragraph (b).
Yes, but it is denoted by inverted commas.
Chairman
It is not.
It is. The inverted commas are at the top of page 51.
Chairman
They also refer to that paragraph?
Yes.
Chairman
That answers the question.
It is absurd that directors of a building society can claim payment of royalties because they redesigned coffee mats for the company canteen or manufactured paper clips of a different shape. It is only fair that an arms length value should be placed on a royalty payment. I do not know whether the term "radical innovation" is one I would use.
I do not agree with the proposition that the royalty income must be capped at the amount spent by a company on research and development. That is grossly illogical. If a person creates a brilliant invention and establishes a company to patent it, or sells a patent to another company for the invention, it seems that the inventor is entitled to fair remuneration on that patent. If the company never spends another penny on innovation and if the invention is the most brilliant in history, I believe the inventor should not be taxed on royalties received from the patent. I do not see how a person's entitlement to receive tax-free royalties should depend on whether the company involved engages in research and development. There is no logical connection between the two. The company might as well contribute money to charity because there is no connection between its failing to create new inventions and providing remuneration in respect of the one useful invention in its possession. I suggest that the Minister remove the second provision and concentrate on the aspects of anti-avoidance and anti-abuse.
Let us consider a situation where a director or employee of Guinness invented a new form of draft beer. That is a good invention and I do not see why payment of tax-free royalties should depend on whether Guinness engages in further research thereafter. I see no logical connection between the two concepts. If it is a good invention, and the patent is genuine, and if the inventor is entitled to be remunerated tax-free in respect of it, I fail to see why the process should come to a halt because the company involved refuses to engage in further research and development. Everyone is in favour of research and development as long as those in charge of a company have a genuine motive to engage in it. However, what is the point in remunerating patent royalty recipients tax-free if an equivalent amount of money must be invested in research and development?
Amendment No. 33 states that in page 52, between lines 14 and 15, the following will be inserted:
(b) The Revenue Commissioners may nominate any of their officers to perform any acts and discharge any functions, authorised by this subsection to be performed or discharged by the Revenue Commissioners and references in this subsection to the Revenue Commissioners shall, with any necessary modifications, be construed as including references to an officer so nominated.
I will address the points raised by Deputies McCreevy and McDowell. This matter has already been addressed on Second Stage. It is agreed that abuses of patent reliefs took place. Amendment No. 33 represents an attempt to stop such abuses. The abuse could be halted completely if we removed the provision but that would be counterproductive because we want to encourage research and development.
There is not enough research and development in Ireland because the 10 per cent tax regime militates against it. There is not much tax cover available to companies in this regard. The IDA presented the case relating to patent reliefs to the Department when it was attempting to attract research and development functions to Ireland from multinationals already located here. However, sufficient tax could not be offset against income to make it attractive to invest such functions in this country. Rather than throwing the baby out with the bath water, this section attempts to retain the baby and clean the water. To that extent, the test to which Deputy McDowell referred, involves a number of matters which can include a number of year's investment in research and development.
The term "radical innovation" means the creation of something which is fundamentally novel. The degree of novelty cannot be other than a subjective judgment. However, there is an OECD precedent for classifying innovations as "completely new", "modestly improved" and "merely a differentiation of an existing product or process". In viewing the foregoing categories in the context of "radical innovation", something completely new would come within its scope but a mere differentiation would not. The modestly improved product which is not a mere differentiation is more likely to be considered radical innovation than a modestly improved process.
A body of precedents exists to which inspectors can refer and the interpretation of "radical" or "innovative" can be reasonably adduced. This matter will be clarified with the taxation administration committee and guidelines will be given to domestic tax practitioners.
Would the Minister provide a definition of a group company?
A procedure was used during deliberations on last year's Finance Bill which provided illumination to everyone.
Chairman
Contrary to the precedent set last year, we cannot use that procedure. We can briefly enter private session to deal with this matter.
The committee went into private session at 5.55 p.m. and resumed in public session at 6 o'clock.
If I come up with a genuine invention and sell it to a large company, will its capacity to remunerate me be limited by this cap with regard to R & D?
No. If a person is unconnected and the patent is bona fide, the R & D cap does not arise.
Can the Minister confirm that two companies shall be deemed to be members of a group if one is a 75 per cent subsidiary of another or both are 75 per cent subsidiaries of a third company?
That is correct.
Why is this not the case when there is a 51 per cent relationship?
I have been informed that 75 per cent of full and total control is the test which is used as distinct from 51 per cent.
Amendment, by leave, withdrawn.
I move amendment No. 33:
In page 52, between lines 14 and 15, to insert the following:
"(b) The Revenue Commissioners may nominate any of their officers to perform any acts and discharge any functions, authorised by this subsection to be performed or discharged by the Revenue Commissioners and references in this subsection to the Revenue Commissioners shall, with any necessary modifications, be construed as including references to an officer so nominated.".
Amendment agreed to.
I move amendment No. 34:
In page 53, lines 7 and 8, to delete "on a claim being made on that behalf" and substitute "on a joint election in writing being made on that behalf by the first company and the other company".
Amendment agreed to.
I move amendment No. 35:
In page 53, subsection (2), line 19, after "group" to insert "if both are wholly or mainly under the control of the same individual or individuals or".
Amendment agreed to.
I move amendment No. 36:
In page 53, subsection (2), between lines 36 and 37, to insert the following:
"(ii) a company shall be wholly or mainly under the control of an individual or individuals if not less than 75 per cent. of the ordinary share capital of the company is owned directly or indirectly by the individual or, as the case may be, by individuals, each of whom own directly or indirectly part of that share capital,".
Amendment agreed to.
I move amendment No. 37:
In page 53, subsection (2), line 41, after "Act" to insert "and where two companies are deemed to be members of a group by reason that both are wholly or mainly under the control of the same individual or individuals those sections shall apply as they would apply for the purposes of the said Part if the references in those sections to a parent company included a reference to an individual or individuals who hold shares in a company".
Amendment agreed to.
I move amendment No. 38:
In page 53, lines 42 to 44, to delete subsection (3) and substitute the following:
"(3) This section shall apply ——
(a) as resects subsection (1), to a royalty or other sum paid on or after the 23rd day of April, 1996, and
(b) as respects subsection (2), to a distribution made out of specified income accruing to a company on or after the 28th day of March, 1996.”.
Amendment agreed to.
Section 27, as amended, agreed to.
Section 28 agreed to.