I am somewhat at a loss to understand the changes introduced by section 19 of the Finance Bill in respect of the treatment of patent royalties and related distributions. It appears that the income from patent royalties which is affected by this can be very low indeed. I understand the original benefits which are now being limited or abolished under this section were introduced because income from patent royalties is, in a very particular way, somewhat equivalent to two incomes from intellectual property. I have had a number of representations regarding this matter and I will refer to one company who put forward a good case. Arguments were put forward in relation to this section of the Bill by a small Irish partnership set up to exploit particular patents. One of the partners — just by way of illustrating how entrepreneurial these people were — sold his house, a second joined the partnership at half his original commercial salary and a third committed his entire manufacturing business as collateral for loans. They had developed a patent, were very interested in keeping it here, in pushing it through to the production stage and then exploiting fully the benefits of the patent. They feel aggrieved. I will summarise their arguments; first, they feel these changes are, in a sense, retrospective. They define retrospective in a rather peculiar way. They suggest that there is a legitimate expectation, that income already earned in this regard should remain exempt. Second, they feel that it penalises those who retained income within their companies to fund future expansion. Third, it makes no distinction between genuine and deserving cases and other cases and, finally, it indicates a bias against genuine entrepreneurs. One can see the validity of their case. They suggest that the Minister and his officials could consider confining the benefits in some way. They suggest, for example, that genuine commercial patentees whose patents have passed through one or more patent offices associated with, say, the European Patents Office, should be the sole beneficiaries of this. This would be one way of closing a loophole which I understand exists for patent income. You can register a patent in South Africa for virtually any sum and then you can exploit the income from that. By defining and limiting it to two European or EC patents offices they suggest that it is one way of closing a loophole here. The manner in which genuine ordinary equity investors in the company, however that is interpreted, would be another way of limiting it and it could also be limited to patent income arising solely from Irish manufacturing business. This is in respect of a patent developed in Ireland which has gone on to the manufacturing stage. I note the general point the Minister is making and it is a very valid and correct one. There is such a plethora of schemes which give so many bolt-holes to people who want to run their business in a tax efficient manner that it is necessary, from the point of view of equity, to close all or several of these. Nonetheless, I think the Minister and his officials could examine this. Although the Minister may not accept limiting benefits to specific bona fide patentees that have established themselves before the European Patents Office or take on board the other suggestions that have been made, at a very minimum he could extend any phase out over a much longer period. He could and should limit the long phase out period to genuine patentees and thereby avoid a loophole such as the South African one being used as a way of creating pseudo-patents from the point of view of exploiting the income. I am not sure what the total amount of money involved in this is going to be but it appears to be very small. The development of patents and the skill of the inventor, particularly the inventor who moves on to the manufacturing stage, is something that we should value. Provided it is bona fide and not a tax loophole, it is something we should try to preserve. I ask the Minister to comment on those points and, specifically, to examine ways of closing any undesirable tax loopholes that may exist and at the same time to retain the positive benefits that the existing scheme has.
SECTION 19.
I would also like the Minister to examine this. I believe that it has been one of the planks on which industrial policy has been built for a number of years, that entrepreneurship should be encouraged in the country. In the case of multinationals, the objective was that, as well as having downstream assembly plants, they would have strong research and development facilities. It seems to me that it is essential when encouraging the development of patents to also encourage research and development facilities. An essential ingredient in encouraging a strong indigenous industrial base is the development of new products and new products would suggest the requisite filing of patents. I have some concerns in this regard. First, it takes a while to move from the prototype stage of any invention to the final stage. The filing and obtaining of patents is a fairly long drawn out process when you consider the period involved from the first days of experimentation right through to the actual filing of a patent and the granting of a patent by the Patents Office. There is an element of retrospection in this when there is a definite cut-off point in the Finance Bill. I ask the Minister to examine the arrangements here and see if they can be phased in over a period.
Second, it seems that companies are being treated more favourably than individuals and I think there is much sympathy for the man in the garage who invents something, maybe he is only a myth and there are no men inventing anything in garages anymore. Maybe everything is done in high-tech laboratories but we still like to think that the man in the garage can invent something. Deputy Rabbitte mentioned Fintan Coogan earlier, a former Member of the Dáil and father of young Fintan who is now in Galway. He was a blacksmith and a great inventor, he had several patents filed. He was a most inventive person and there are still people like that around. We read about Silicon Valley, Palo Alto and places like that; that particular high-tech electronic industry seems to be founded in the garages and the PhD graduates from Stanford University and from the Institute of Technology in Massachusetts who move to the west coast. I would not like a situation to be enshrined in law which gave more favourable treatment to companies than to the individual, therefore, it is necessary that this be worked out in some type of phasing arrangement.
In regard to this section I do not think the Minister has fully considered and appreciated the implications of what he is proposing. I had a constituent who spent a considerable amount of money developing a patent. He spent much money and time on his idea, he had many people advising him and so on and it did not work out for him. It is sad that people who show flair and initiative are not rewarded when they do succeed. This person is still unable to get a job because he left employment to pursue this activity. Deputy Noonan mentioned the man in the garage with his own ideas trying to do something like that. That is initiative, that is enterprise and for every thousand of those men at home in garages perhaps one gets through. There are 999 who fail. We want those 999 who fail to go back and try again. If we do not provide rewards for people who would be able to succeed in this type of enterprise then we, as a country, if we wish to provide employment, will be failing. I note from the explanatory memorandum that the Minister generously provided that the exemption is being retained for companies and I do not know why it is being retained.
I support the exemption being retained for companies but I cannot see why the small businessman is not being given this reward. The greatest example of a country wich encourages entrepreneurship, up to recently, was Japan. That country encouraged enterprise, initiative, hard work and most of the industries in Japan are very small industries. They have many big industries but many of them are very small and in this area the individual is very important. Under this section the small businessman with initiative is being hit. I know of people with patents and with good ideas but I only know of a few who succeeded. I know quite a few who were unsuccessful but we should continue to give them the necessary support. We have a major crisis in regard to employment. This amount of money that will be saved by this proposal, and I am not certain of the figures involved, will be very little. These enterprising people provide us with hope and opportunity and we have to reward them for their enterprise. I would ask the Minister to seriously consider withdrawing this proposal.
This secton phases out the exemption for individuals from income tax on patent income and on dividends received by individuals paid out of exempt patent income. The exemption will continue in full for companies. Therefore, if the company is profitable and the money is retained within the company the exemption is still secured. Section 34 of the Finance Act, 1973, provides for an exemption from tax for income derived from a patent where the principal work in devising the patented was carried out in the State. I do not disagree with what has been said by Deputies Roche and Noonan but the difficulty is the abuses that are likely to occur in the future. I know Deputies will have seen and we have been perturbed in the Department by some newspaper advertisments in relation to this matter advertising a project as the last great tax break. A number of periodicals and tax journals have been looking to the potential of how they can use their ingenuity to find ways around it within and without the State and this is a long way away from the provisons of section 34 of the Finance Act, 1973.
The section provides for the taxation of one-third of patent income, or dividends paid out of such income, received by individuals, in the period from 24 April 1992 to 5 April 1993; for the taxation of two-thirds of such income and dividends in the tax year 1993-94 and for the taxation of the full amount of such income and dividends in 1994-95. In addition, where the annual amount of dividends paid to an individual in any of the years 1992-93 or 1993-94 exceeds 125 per cent of the average amount received by him or her over the four year period 1988-89 to 1991-92, the excess will be taxable in full. Deputies Roche and Noonan raised this matter and Deputy Noonan raised it on Second Stage. In relation to the phasing out process, I do not want to hit an individual who spends half his lifetime trying to find some great mechanism for doing something new.
Some of the patents that people file now are far fetched, They are far from the idea of patents we all understand. Many of the projects put forward as patents are very minor. They are neither great works of Mr. Coogan nor of Silicon Valley. Having said that there is significant employment in this area, there are not that many people or companies involved and the CII have advised me of the small number of companies they have been dealing with. By keeping the money within the companies — I want to make that point clear — we have covered a great number of them in that way. When the money leaves the company it can be taxed. You could argue that if a person spen a long time working on a patent project, he would require some kind of incentive. Can a way be found of providing an incentive for those individuals but not for the many people who lease patents to others and find ways of getting around the system? That is what we have to consider.
Deputies Noonan and Roche asked if the phasing could be examined. I will try to do that before Friday; we are working on it. I have a file here which I have not had a chance to look at and I will see if we can do anything. The real difficulty is can we do this for the small number of genuine individuals without leaving a major loophole. I will return to this again on Friday.
Could I make a small suggestion to the Minister. Maybe there is some way of confining the tax benefits of the patent income to the patentee rather than allowing patents to be leased out, or whatever other tax dodge is used because I also believe that the number of bona fide patents is very small. The number of characters that come out of the garage saying: "Eureka, I have found it" having invented a new biro or whatever is very small. The big problem about it is that income on intellectual properties is highly transferrable. If a person does not like the regime that exists here they can always move elsewhere and exploit it there and that is a potential loss for us. I take the point the Minister is making, obviously, in order to maintain equity, he has got to close as many loopholes as possible. Perhaps if the benefits, such as they are, were retained in law and limited to the individual, that would be a way of achieving equity and at the same time, protecting Deputy Noonan's mythological character who comes out with his hair in disarray, smoke pouring out of the garage behind, finally having found it. There is a place in society for every idiosyncratic personality as some of our minority parties know.