Vol. 558 No. 6
7 Mr. Boyle asked the Tánaiste and Minister for Enterprise, Trade and Employment her views on whether a strategy which allows tax breaks for corporate research and development expenditure would have significant benefits in promoting higher value added industries here; and if her Department will initiate a study to show the way in which such tax breaks could be operated. [25109/02]
The level of research and development undertaken by business in Ireland is low for an economy whose output and exports are dominated by high technology sectors. Ireland's business expenditure on research and development (BERD), at around 0.9% of GDP (1% of GNP), is well below the OECD average of 1.5%.
Ireland's manufacturing output is now dominated by sectors that require high research and development intensity to remain competitive. As regards the foreign-owned sectors, it is clear that much of the research activity which underpins the employment, output and exports in Ireland is conducted overseas and not in Ireland. This is a significant weakness that I believe must be addressed. The share of indigenous manufacturing output devoted to research and development has remained static at 0.9% between 1995 and 1999 compared to an OECD average of 2.4%. However, within that overall number eight indigenous sub-sectors have research and development intensities that exceed the OECD average.
I am very conscious of the need to foster a more knowledge-intensive economy in order to provide a sustainable long-term basis for growth in employment and incomes. I accept that this will require, among other things, a substantial increase in public and private investment in research and development. The major State investment now under way to strengthen public research infrastructure and capabilities needs to be complemented by a sustained rise in business research and development expenditure, particularly among foreign firms in high-technology sectors whose research intensity lags far behind that in other advanced economies.
Tax incentives are widely used to stimulate business research and development in other advanced economies, and their effectiveness in doing so has been established by a series of empirical studies, particularly among large firms in high-technology sectors. Internationally, the provision of fiscal incentives for research and development has increased significantly in recent years, and 18 OECD member states now provide tax credits or enhanced tax allowances for this purpose.
Against this background a group involving Forfás, IDA Ireland, Enterprise Ireland and my Department, with commissioned input from KPMG, has, over the course of this year, undertaken a detailed analysis of strategic and operational issues surrounding fiscal incentives for R&D in Ireland. This has now come to hand.
I thank the Minister for her reply. I did not mention the issue of the corporation tax rate in my question. I was afraid I might scare some of my Opposition colleagues. Rather than relying on a low corporate tax rate as our investment and enterprise strategy should we not take a more flexible approach and mix a higher corporation tax rate with grants or tax write-offs for research and development expenditure? This would be a better long-term business investment strategy.
Does the Minister agree that this route should be considered and possibly supported? Will the Minister give more details of the report she received from the study group? Will it be made available to the House and will Members have an opportunity to discuss the issue? This is one of the key issues in our long-term industrial development strategy.
Does the Minister agree that a higher rate of corporation tax, if it were flagged in advance and introduced gradually, might be a successful long-term tax strategy? This may be a strange thing to ask the day after corporation tax was lowered from 16.5% to 12.5%.
No, I would not agree with that but I agree with much of what the Deputy says. Low corporate tax rates tend to discourage research and development which tends to take place in countries which have higher corporate tax rates, for obvious reasons. Our low corporate tax rate delivers approximately 18% of the tax take. Rates three times higher in the rest of Europe on average contribute approximately 5% or 6% of the tax take. We get more from the lower rate.
Having a lower corporate tax rate as standard is not inconsistent with having tax credits for research and development. The study was undertaken to see how we could introduce it in a way that was additional and would not merely allow companies to move work over that they would do anyway. When the Government and the Minister for Finance have considered the matter I will be delighted to make the study available to Deputies. It is a matter which would have to be considered in the context of the Finance Bill.
I cannot understand the Minister's logic in bringing in tax credits as well as maintaining the low rate of corporate tax which could, in effect, give some businesses a zero rate. In the interest of equity and revenue raising we must take some tax from corporate profits. We cannot provide tax credits without increasing the tax in that case.
Nineteen or 20 other countries are doing this at present. It would not be a significant scare to international investors if it were flagged and gradually introduced. I find it hard to believe the Minister is considering bringing in further tax credits as well as the low rate.
The United Kingdom, which has a low rate of corporate tax although higher than ours, recently brought in a tax credit system for research and development. We must have flexibility in this regard. I am not talking about companies paying no tax. The introduction of a tax credit would have to be ring-fenced around additional expenditure in genuine research and development, which is extremely expensive. It is, perhaps, more expensive in Ireland than in some countries because of our higher wage costs. That is why we must engage seriously in research and development if we are to remain successful in the future. We will not be successful simply making other people's products or converting other people's ideas into products. We must generate and innovate.
That is one of the reasons Science Foundation Ireland was established. Notwithstanding the cuts in expenditure in my Department this year of more than 5%, Science Foundation Ireland's budget has doubled for that precise reason.
