The Research and Development (R&D) Tax Credit is an important feature of the Irish Corporation Tax (CT) system. The primary policy objective is to increase business R&D in Ireland, as R&D can contribute to higher innovation and productivity. More broadly, the tax credit forms part of Ireland’s corporation tax offering aimed at attracting FDI and building an innovation-driven domestic enterprise sector. The credit enables Ireland to remain competitive in attracting quality employment and investment in R&D.
The Pillar Two minimum effective tax rate will have an impact on the net benefit to large MNCs of the R&D tax credit. A corporate group will be within scope of Pillar Two rules where it has consolidated group revenue of over €750 million in at least two of the previous four years.
Pillar Two will result in a net reduction in the value of the tax credit for claimant companies that are in scope of the 15% minimum tax. Under Pillar Two rules, a tax credit that is not a “Qualifying Refundable Tax Credit” (QRTC) is deemed to reduce the tax paid by the company, thereby reducing the effective tax rate and potentially resulting an increase in Pillar Two top-up-tax due. A QRTC is treated as income, rather than a reduction in tax paid. This preserves the majority of the value of the credit, however the treatment of the credit value as income means that it becomes subject to the minimum tax calculations. Changes were made to the operation of the R&D tax credit in Finance Act 2022 in order to bring it in line with the definition of a QRTC. Hypothetically, to deliver the same net benefit as a 25% tax credit currently, a tax credit of 29.41% would be required where a Pillar Two top-up tax applies.
Revenue data does not separately identify R&D Credit claimants as being either SME or non-SME companies. However, a reasonable approximation can be made using the categorisation of companies in published Revenue data. The latest publication contains information in relation to the 2021 tax year and is available at:revenue.ie/en/corporate/documents/research/ct-analysis-2023.pdf.
This includes information concerning the number of Revenue Large Cases Division (LCD) companies and non-LCD companies who have claimed the credit. While companies that are outside the remit of LCD are not necessarily SMEs, the majority would be, therefore this data provides a proxy to estimate claims by SME and non-SME companies.
In view of the group turnover threshold of €750 million, it is expected that most SMEs will not be in scope of Pillar Two rules.
