Dáil Éireann díospóireacht -
Tuesday, 28 Feb 2017

Vol. 940 No. 3

Knowledge Development Box (Certification of Inventions) Bill 2016 [Seanad]: Second Stage

Minister of State at the Department of Jobs, Enterprise and Innovation (Deputy John Halligan)

I move: “That the Bill be now read a Second Time.”

I am pleased to present the Knowledge Development Box (Certification of Inventions) Bill 2016 to the House for consideration. The main purpose of the Bill is to establish a certification scheme to allow small and medium-sized companies to avail of the Knowledge Development Box.

When implemented, the Bill will allow companies with intellectual property assets that are non-obvious, useful and novel to qualify for the Knowledge Development Box. The Bill will establish a certification scheme to be administered by the Controller of Patents, Designs and Trade Marks. The controller will issue certificates to SME companies if applications under the certification scheme meet the criteria of being non-obvious, useful and novel.

The Knowledge Development Box, KDB, was introduced in the Finance Act 2015 as a tax incentive to encourage innovation and boost research and development. Under this initiative, a corporate tax rate of 6.25% will apply to profits on intellectual property assets that result from research and development carried out in Ireland. The Finance Act provides that three distinct categories of intellectual property qualify for the KDB. These are patents, copyrighted software and inventions that share the characteristics of patents in that they are novel, non-obvious and useful. It is the third category of intellectual property assets that the current Bill is concerned with and for which a new certification scheme is proposed. The KDB is already operational for the first two categories, patents and copyrighted software, since 1 January 2016.

This third category of assets is targeted at small and medium-sized companies with a view to ensuring that they too can qualify for the KDB. The Finance Act imposes certain financial limitations on the definition of companies that qualify in this category. The limitations are for companies with income arising from intellectual property of less than €7.5 million and with global income of less than €50 million. The legislation will, when enacted, be of direct benefit to companies of a relatively smaller economic scale. We have almost 2,000 companies performing R&D activities in Ireland with turnover under €50 million and they will be able to access the KDB through this proposed new scheme.

A secondary purpose of the Bill is to re-introduce substantive patent examination for Irish patents. Under the Patents Act 1992, the activity of substantive patent examination was discontinued at the Irish Patents office. The Finance Act provides that in order for patents to qualify for the KDB they must be granted following a process of substantive patent examination. This is designed to ensure that only the highest quality patents qualify for the KDB.

The amendments in the Bill to the Patents Act have the effect of reintroducing substantive patent examination in Ireland. This will result in higher quality Irish patents in line with best international practice. Moreover, the intention is to ensure that Irish patents will continue to qualify for the KDB.

Evidence shows that investment in R&D increases economic productivity, competitiveness and improves health, social and environmental outcomes. Firms with a persistent R&D strategy outperform those with an irregular or no R&D investment program. R&D is crucial for creating and maintaining high value jobs and for attracting new business. However, it is the case that depending on the product or process, R&D can be very expensive and not all R&D is successful. A company may experience many failed attempts before it sees results from investment of time, money and resources. These can be considerable, particularly for SMEs. Therefore the extension of the KDB to indigenous small and medium-sized companies is expected to incentivise greater levels of innovation with a view to leading to increased job creation. Promoting innovation is a concern for me in my role as Minister of State with responsibility for innovation.

By way of background, I should say that the KDB was introduced in response to the OECD’s consideration of harmful tax practices. Ireland has the first fully compliant Knowledge Development Box that meets the new OECD guidelines, developed following this consideration. The overall KDB scheme comes within the area of responsibility of the Minister for Finance.

The report on tax expenditures published with the budget in October 2015 provides an ex ante evaluation of the KDB scheme. This evaluation outlines the basis of the best estimate of tax forgone for the Exchequer of €50 million. This €50 million is in respect of’ all aspects of the KDB, including the certification scheme aimed at SMEs, which is the purpose of this Bill.

All tax expenditures are reviewed on a regular basis in line with the Department of Finance guidelines for tax expenditure evaluation published in October 2014. These rules apply to the Knowledge Development Box and an evaluation will take place within five years of the introduction of the scheme. The review of the overall KDB scheme will be a matter for the Minister for Finance.

A certificate granted under this Bill provides the gateway for SMEs to apply the 6.25% corporate tax rate on profits arising from the invention. Grant of a KDB certificate does not, however, guarantee that the SME qualifies for this lower rate of corporation tax. Revenue will consider tax returns on the basis of the provisions applicable to the KDB scheme introduced by the Minister for Finance in the Finance Act 2015 that came into effect on 1 January 2016. Revenue will have the necessary information on the KDB to provide reliable information to Government on an ongoing basis on the use of the KDB to inform future evaluations of this initiative.

I will now turn to the specifics of the Bill and set out what each section is intended to do. As I have already mentioned, the intention in the Bill is to introduce a certification scheme for SMEs in respect of their intellectual property assets in the nature of inventions. This scheme involves the Controller of Patents, Designs and Trade Marks as the designated State authority to certify the assets as being novel, non-obvious and useful. When examining applications under the scheme, the controller will apply the same criteria used to establish novelty and inventiveness as that which currently applies to patents.

Unlike patent holders, companies granted a KDB certificate will not have to publicly disclose the nature of their invention. Nor will they have a monopoly and market exclusivity rights for that asset. The certificate will assist SMEs to qualify to apply the lower rate of corporate tax of 6.25% to profits arising from the IP asset. This is half the normal corporate tax rate of 12.5%. Let me be clear that the KDB certificate will not of itself automatically mean that a company qualifies for the lower tax rate. The Revenue Commissioners can, and will, carry out their own assessments to ensure that a valid basis exists for the company to claim the lower rate of corporate tax. This practice already exists in the context of the R&D tax credit scheme where Revenue can randomly undertake assessments or audits. The certificate is one step in the qualification process for the lower tax rate. Companies that can qualify for this certification scheme are those with less than 250 employees and income of less than €7.5 million arising from intellectual property. Global turnover from intellectual property must be less than €50 million. The profits must result from R&D activities carried out in Ireland.

The second purpose of the Bill is to amend the Patents Act 1992 by requiring that in the future all Irish patents granted will be on the basis of substantive patent examination only. Under the current system, it is possible to grant Irish patents on the strength of evidence of novelty in the form of a search report. These amendments will ensure that all Irish patents granted after this Bill is enacted will be of a high quality in line with best international practice.

Moreover, it will ensure that all patents granted by the Irish Patents Office will continue to qualify for the KDB.

I propose in this Bill to introduce a substantive patent examination regime for Irish patents. These changes signal a change in the manner in which the Patents Office will examine patent applications in the future. The Irish Patents Office has a long standing arrangement with the UK Intellectual Property Office to provide evidence of novelty in the form of a search report. When the Bill is enacted, a search report alone will no longer satisfy the evidence of novelty requirements but will in addition require a written opinion. This additional service is also being acquired from the UK patent office. That is patentability. We will require an opinion on that.

Looking at the Bill in detail, Part 1 includes sections 1 to 3 and contains standard legislative provisions relating to Title, commencement, citation, definitions and expenses.

Part 2 contains sections 4 to 6 and sets out the mandatory criteria that applications for inventions under the scheme must meet. This part sets out also the mandatory exceptions and these are common also to the exceptions that apply in patent law. Section 4 sets out the criteria that an invention must meet in order to qualify for a KDB certificate. Put simply, the invention must be novel, non-obvious and useful. This section also lists those inventions that are not considered to be inventions for the purposes of KDB. For example, the invention cannot be granted a certificate if it is a discovery or a scientific theory. Section 5 defines specific inventions that are excluded for reasons such as that the commercial exploitation of the invention would be contrary to public order or morality or that the invention is a plant or animal variety derived from a biological process. Section 6 provides that a KDB certificate will typically issue for one distinct invention.

Part 3 contains sections 7 to 15, inclusive. It deals with the specific and detailed application requirements under the scheme to the controller, including an outline of the controller’s decision-making process and review process.

Section 7 sets out the qualification criteria and financial limits for companies that can apply under the KDB certificate scheme and establishes the information requirements for applications under the scheme. Essentially, the application will have to contain the title and a clear, concise, detailed description of the invention, the date on which the invention began to be used, produced or marketed, the novel features or improvements of the invention that did not previously exist, along with a description of its advantageous effects, and be accompanied by an opinion from a patent agent attesting that the invention is novel, non-obvious and useful.

Section 8 deals with applications that are submitted but do not initially meet all the requirements laid out in section 7. The controller can write to the applicant identifying the requirements that were not met. The controller can defer consideration of the application until the revised application is submitted. If no response is made to the controller’s notice the application is deemed withdrawn after a period.

Section 9 provides for the treatment of applications in respect of two or more inventions. A certificate can typically be issued in respect of a single invention only. Under section 9 the controller can invite the applicant to choose which element of the invention should be considered for certification purposes. The applicant can make a separate application or applications for the other inventive elements of the application.

Section 10 allows the applicant to withdraw an application at any time before the issue of a KDB certificate.

Section 11 provides that an applicant who initially withdrew an application is not prevented from lodging the same application again at a later date.

Section 12 provides that the controller can issue a KDB certificate if he is satisfied the invention meets all requirements set out in Part 2. It also outlines the particulars that will be included on the KDB certificate.

Section 13 outlines the procedures to be adhered to if the controller refuses to issue a KDB certificate. In this situation the controller must clearly set out the reasons in writing for the refusal.

Section 14 offers the applicant a review of the original decision. This involves an internal appeals process in which the reviewer will be of a grade senior to the original deciding officer. This reviewer will confirm or cancel the original decision. Under section 15 an application containing new information may be made in respect of an invention for which a certificate has been refused.

Part 4 contains sections 16 to 19, which deal with the administration of the KDB certification scheme. Section 16 allows the controller to authorise officers of the Patents Office to carry out functions under the Bill on his behalf. This is typically to allow the patent examiners at the office to examine applications under the scheme.

Section 17 deals with the confidential nature of the KDB certification applications. The controller is required to keep records of all applications received, certificates granted, refusals to issue a certificate and reviews undertaken. As applications will contain commercially sensitive information it is essential that they be kept confidential. The controller will not disclose the invention publicly or advertise it in any way. This section also provides that anyone dealing with an application on behalf of the controller will be guilty of an offence if they disclose information submitted in support of the application.

Section 18 provides for an annual report containing statistical information to be provided by the Controller of Patents, Designs and Trade Marks to the Minister of Jobs, Enterprise and Innovation as part of the controller’s annual report. This report will be laid before the Houses of the Oireachtas. Section 19 is a standard indemnity provision protecting the controller and his staff from legal proceedings as long as they have acted in good faith in the course of their official duties.

Part 5 of the Bill contains sections 20 to 24, inclusive. Section 20 creates an offence for the forging and use of forged documentation under the Bill. Section 21 enables the Minister to make rules providing for fees and time periods referred to in the Bill. Section 22 creates an offence whereby an officer of a corporate body that commits an offence, is also guilty of the offence. Section 23 is the standard provision concerning the disposal of fees to the Exchequer. Section 24 enables the controller to specify the form of any document referred to the in the Bill.

Part 6, containing sections 25 to 31, amends a small number of provisions in the Patents Act 1992. The amendments have the effect of reintroducing substantive patent examination for Irish patent applications. Substantive examination involves the detailed examination of a patent application to assess novelty and inventive step.

Section 26 is a transitional provision intended to cover the position of patent applications filed under the Patents Act 1992 but before the coming into effect of the amended provisions in this Bill. It clarifies that the new regime will apply to patent applications made after the Bill is commenced. Applications made prior to this date will continue to be processed under the provisions of the Patents Act 1992.

Section 27 amends section 29 of the Patents Act which requires that a report and a written opinion as to patentability must be filed with the office. It is against this evidence that the Patents Office will substantially examine the application. Section 28, which amends section 30 of the Patents Act, enables the submission of similar evidence of novelty from a foreign patent office. Section 29 allows the controller to consider observations from third parties on the issue of the patentability of an invention. Section 30 amends section 31 of the Patents Act. It empowers the controller to refuse a patent application that does not comply with the requirements as to novelty, inventive step and industrial application.

Section 31 of the Bill amends the annual reporting provisions in section 103 of the Patents Act. Whereas the controller currently lays his annual report before the Oireachtas, the changes introduced by the Bill will require him to make his annual report to the Minister who in turn will lay it before the Oireachtas. This is in keeping with current good corporate governance practices applicable to offices and agencies.

I am pleased to commend this Bill to the house. I look forward with interest to the contributions of Members on this and subsequent Stages of the Bill.

Acting Chairman (Deputy Bernard J. Durkan)

Deputies Niall Collins and James Lawless are sharing time.

Deputy Niall Collins

Fianna Fáil supports the Knowledge Development Box (Certification of Inventions) Bill 2016 and looks forward to strengthening its provisions on Committee Stage. The Bill will enable SMEs, which employ around 920,000 people nationwide, to avail of the knowledge development box, KDB, taxation scheme on profits relating to research and development activities, with a reduced corporation tax rate of 6.25%.

The Bill also extends the KDB definition of intellectual property beyond patents and copyrighted software to what has been referred as the IP equivalent to a patentable invention. This will permit Irish SMEs to include inventions that are certified as novel, non-obvious and useful. However, it has been pointed out that the certification will be decided by the Patents Office, the same entity that decides patents. While the this measure was announced in October 2014, successive Fine Gael-led Governments must be criticised for taking over two years to come forward with primary legislation to enable SMEs access this tax scheme.

The freezing of this Bill is appalling considering that there are provisions in it to reduce the regulatory and compliance burden on micro and medium-sized enterprises. Given how exposed Irish exporters are to a hard Brexit, this is yet another example of the slow response by the Government before and after the UK referendum in taking every measure at its disposal to safeguard Irish SME business and employment. In this regard, I call on the Minister for Jobs, Enterprise and Innovation, Deputy Mary Mitchell O'Connor, to immediately complete Report Stage of the Companies (Accounting) Bill 2016 and accept amendments put forward by Fianna Fáil that will secure high value Irish jobs as a Brexit contingency measure. However, the UK’s competitive edge for enterprise and attracting new businesses and jobs has seen Ireland slip further behind our near neighbour. Despite the Government's attempt to claim that Irish competitiveness levels are improving, the latest statistics say otherwise.

Ireland has continued to plunge on the Word Bank’s ratings for the ease of doing business across 190 economies, dropping to eighteenth in its 2017 report. The Taoiseach has failed to meet his 2016 target of making Ireland the best small country in the world in which to do business. Ireland has fallen behind Georgia, Latvia, Estonia and Macedonia in global rankings. Budget 2017 did not close the competitiveness deficit with the UK.

The UK will still have a more attractive capital gains tax relief, which applies a 10% rate to entrepreneurial gains of up to £10 million, far in excess of the €1 million Irish limit. The current regime still puts Ireland at a competitive disadvantage as a location to conduct business in. The chief executive of the Irish Exporters Association has said that the reduced capital gains tax rate does not bring us on to the racetrack given that the UK had a ceiling that was ten times the scale of Ireland’s £1 million threshold. Dublin Chamber of Commerce said that the changes will do little to stem the flow of start-up companies moving to the UK from Ireland.

Irish start-ups are also attracted to the UK enterprise investment scheme, which makes early-stage capital much more readily available in the UK. In Ireland, the employment and investment incentive scheme provides individual investors with tax relief of 30% in respect of investments of up to €150,000 per annum. However in the UK, the enterprise investment, which is similar to the enterprise investment scheme in Ireland, enables investors to receive tax relief of 30% on investments of up to £1 million.

The UK is planning to reduce its corporation tax rate to 17%, which would bring it closer to Ireland’s 12.5% rate. The Government needs to use every available tool to make the current regulatory landscape a more attractive location to retain and attract new businesses and entrepreneurs to establish in Ireland. I find it extraordinary that the Minister has refused to review her Department's ten year strategic enterprise policy, Enterprise 2025, following the Brexit vote.

Fianna Fáil has called for the immediate review of all the employment and export targets in Enterprise 2025 following publication of two recent ESRI Brexit impact reports. There is no allowance in the Enterprise 2025 forecasts, published over 12 months ago, for the impact of Brexit on Ireland in regard to employment levels and export targets based on the various UK trading scenarios that might emerge in a hard Brexit scenario.

The ESRI report, Modelling the Medium to Long Term Potential Macroeconomic Impact of Brexit on Ireland, indicated a hard Brexit with Britain operating under WTO trading rules would result in Irish unemployment increasing by 2%. Another ESRI report, The Product and Sector Level Impact of a Hard Brexit across the EU, laid out a chilling picture for Irish exporters and related jobs. In a WTO tariff scenario post-Brexit, Irish exports to the UK would be the most exposed in the EU, leading to a reduction of 4% of total exports. Shockingly, Ireland would face a severe tariff exposure. While we make up 5% of the UK’s total imports, we would be charged nearly 20% of the total EU tariff.

The Government needs to play a proactive role with business scenario planning, so that Irish companies impacted by Brexit can take informed strategic and commercial decisions to plan for this situation. The Minister needs to review her Enterprise 2025 strategic document. We are happy to support the Bill on Second Stage and will seek to amend it, where necessary, on Committee Stage.

Deputy James Lawless

As a Fianna Fáil spokesperson on science, technology and research, I am pleased to support the Bill and commend it to the House. I agree with the comments of my colleague, Deputy Collins, in terms of the Bill and its place in the wider context.

There is no doubt that the Bill is very necessary and welcome, and will make a significant difference to SMEs in terms of how they engage with research and innovation activities. It has many sensible sections, which the Minister of State and my colleague have already detailed. It is important to step back from the detail and consider the wider international context.

We are well aware that we are in an economic battle with other countries. The advent of President Trump in the United States, the march of Brexit in the UK and the wider context of the EU and efforts to introduce a common consolidated tax base and other such measures are all of concern.

We have always praised and taken pride in the many attributes we have. Our low corporation tax rate has been one such positive measure. Our English speaking vernacular, the dialects of our workforce and the fact we are in the eurozone are all very important measures in terms of international competition when we are looking for jobs and encouraging businesses to locate, centre and start up here. However, as is often the case, our greatest asset is our people. Our highly educated, motivated and creative workforce is the real secret to our success.

I recently had a conversation with Mr. Eamonn Sinnott from Intel, who is a remarkable man in his own right. We discussed the Ireland's Edge project, with which I am sure the Minister of State and my colleagues are familiar. High-tech employers and academics set out to try to capture what makes the Irish unique in terms of creativity and innovation. We have seen those attributes across the arts, the sciences and the business world. It is very difficult to quantify, but we can all agree that there is a unique and positive attribute of the Irish people, namely, that we are a creative people and make things happen. The core of this Bill is to reward that in every sense, including in a monetary sense. The talent, education and skills bases are what give us a competitive advantage, and mean that, despite international events, we can triumph.

I understand the knowledge development box is in the context of the OECD and base erosion and profit shifting, BEPS, initiative. I understand we are the first country in the world to follow through and introduce an OECD compliant tax measure of this sort. That is very welcome and something of which we should be proud. We are a world leader in that sense. I understand the Bill will replace the double Irish, which was phased out a couple of years ago. It makes a lot of sense to introduce such a measure, and it is critical in allowing innovation to succeed and be rewarded.

The research and development tax credit is a similar measure, which allows for a 25% return on innovative activities. However, following the extension of the knowledge development box to SMEs, perhaps we could learn from the operation of the research and development tax credit already in place. It is a fine measure and helps to stimulate research and innovation.

In a previous life, I worked on a project that qualified and saw this in action. However, I have spoken to SMEs that have told me very few of them have engaged on the R&D tax credit. Despite the welcome extension of the knowledge development box to SMEs, I worry that the same pitfalls would face them.

One of the reasons the R&D tax credit is apparently not as useful to SMEs as it could or should be is the uncertainty about eligibility or the credit's application. If an SME, by definition a smaller company with limited resources, is to invest in an invention or innovative project with the view to later on claiming back an R&D tax credit or in this case a knowledge development box tax credit, it might find that it falls foul of Revenue because of a lack of Revenue guidelines. There is an uncertainty about what projects fit the bill and there is the possibility of a retrospective audit or a Revenue spot check three or more years later. Revenue can come back to the company and state that the innovative project that the company claimed an R&D tax credit for did not qualify and state why. There seems to be discrepancies and a lack of consistency in the application of the credit which is off-putting to companies that have limited resources and are trying to decide where to concentrate those resources. They are afraid that a couple of years down the line there may be a claw-back from Revenue on activity that they in good faith entered into with the intention of claiming the credit. Perhaps the Minister and those in the Department might examine that issue from the R&D tax credit point of view and with the knowledge development box in mind as well because some guidelines would be useful.

From speaking to colleagues in SMEs and bodies such as the Small Firms Association and ISME, I know that there was a successful initiative a couple of years ago called JobsPlus. SMEs were encouraged to take on a worker, that is, to take someone from the unemployment queue and into the workforce, for which they received a direct credit. I think a payment was made to help them pay the cost of hiring the worker. It was a direct job activation measure that took people into the workforce but there was a very real commodity in the sense that there was an actual financial and direct support provided to the company to take on the worker. For SMEs with limited resources, a tax credit down the road versus a cash payment right now is like a bird in the bush being worth two in the hand, as they say, or is it the other way around? Whatever it is, having the income now is better than having it potentially as a credit in a year's time. Something like a JobsPlus for R&D would be welcome and would make sense as it would allow companies to directly intervene because they could with good knowledge and in confidence embark on a research policy. I suggest to the Minister and the House such an initiative for research in the way that there was JobsPlus in the past.

On a critical note that is relevant to today's debate, I am very disappointed about the programme for research in third level institutions, PRTLI. I raised this issue a number of times in the House over the past six months and again last week under the Order of Business. If we are to develop the knowledge economy and innovation and reward research, both at academic and business levels right down to the SME sector, which compares with some of the research institutions, we have to be serious about it and serious about funding it. From the figures I received on the PRTLI in the past couple of days, I understand it is now cut down to €14.4 million for the 2017 round. This is more than a 50% cut on the previous year which in itself was small fry compared to what it was in previous years. Since its introduction in 1998, the PRTLI has been a successful research fund that was targeted across many different academic institutions, projects and disciplines. It was broadly based and encompassed humanities as well as the STEM area. However, it appears to have been eroded constantly to the point that its funding is now €14.4 million, which is small money compared to other research projects.

I note that the Minister for Jobs Enterprise and innovation, Deputy Mary Mitchell O'Connor, from whose reply to the parliamentary question the figures emerged, referred to funding for Science Foundation Ireland, SFI, which is extremely welcome. It is a fantastic agency that does fantastic work and I praised it in this House only last week in the context of another debate, but there cannot be a one size fits all approach. Funding for SFI and other institutions is no excuse for robbing Peter to pay Paul and cutting back the PRTLI, which has a broader appeal, is available to draw down by other institutions and universities and can be matched with, for instance, European research council funding. There were Supplementary Estimates in both 2015 and 2016 for the PRTLI and I appeal to the Minister and the Department to examine whether the €14.34 million could be bumped up. The programme is very deserving and the research institutions and universities will need it.

To put in context how it can be used, I visited a number of universities over the past number of months. They showed me, for instance, where a new building was commissioned, a new lab was designed or new measuring equipment was put in place using PRTLI funding. Five or ten years on, the equipment is beginning to fail. It is the equivalent of having a brand new school where in the classroom the children have no schoolbooks or outdated ones. The PRTLI funded the bread and butter machinery, buildings, equipment and resources. It is a much needed fund as opposed to other funds that may be more particular to research teams and high potential individuals. Those are also necessary but they are two different things and both need to be resourced equally because they are both extremely important.

We welcome the Bill and will support it. Its extension to SMEs is needed. SMEs are agile, versatile and up for a challenge. Many of them would love to invest in R&D and perform more innovative activities but, as I have outlined, there are practical obstacles to them doing so. I commend the Bill. As I stated, we will support it but I hope that some of the obstacles will be addressed during the passage of the Bill or through other measures. I rest my contribution there.

Acting Chairman (Deputy Bernard J. Durkan)

I call Deputy Maurice Quinlivan who has 20 minutes.

Deputy Maurice Quinlivan

I do not think I will need that much time but we will see what we can do. I welcome the broad thrust of the Bill but Sinn Féin has a few issues that it will raise on Committee Stage although we will raise most of them before then. As the Minister of State is aware, the Bill is technical in nature. Its primary aim is to amend sections of the Patents Act 1992 to allow for the introduction of a substantive examination of patent applications and facilitate the issuing of long-term patents, with a certification scheme for the knowledge development box that will allow small companies to qualify. Once certified, SMEs involved in research activities will be able to avail of a reduced corporation tax rate of 6.25%. As explained in the Bill, an SME is a company with no more than 250 employees, intellectual property assets of less than €7.5 million and global turnover of less than €50 million. We have to measure this description against that of very small community businesses that are crippled by rates, rents and various taxes, practically none of which they can avoid or on none of which they get deals.

My party believes it is well past time for an honest debate on corporation tax. Just this week the European Commission again attacked the reckless tax-cutting agenda of the Government and its use of volatile corporation tax receipts to underpin spending. In the past my party’s finance spokesperson, Deputy Pearse Doherty, dared to mention the name of a particular company, Apple, but he was shouted down by Fine Gael Deputies, including the Minister of State at the Department of Foreign Affairs and Trade, Deputy Dara Murphy. This is the level of maturity that this and previous Governments have shown when it comes to a discussion about corporation tax. That this remains the position, even in the face of the recent EU ruling against Apple, is simply not good enough.

Sinn Féin supports having an open, transparent and competitive all-Ireland corporation tax rate that does not allow large multinationals off the hook in respect of their tax responsibilities. It is said that the knowledge development box is the first such scheme in the world to comply with the terms of the OECD project on base erosion and profit shifting, BEPS, to minimise corporations' efforts to minimise their tax liabilities. It is also said it is to encourage investment specifically in research and development activities by reducing the tax companies pay on earnings. My party is all for indigenous Irish companies that can grow and employ significant numbers. One hopes these companies will be much more loyal to the country than those which up and leave overnight once economic conditions deteriorate, as we have seen happen on too many occasions. We need to focus on supporting small SMEs that will have a loyalty to their communities, their staff and their country. That said, the measures in today’s Bill need to be seen for what they are - a further tax avoidance measure that the ordinary Joe Public simply cannot avail of. Companies with a turnover of up to €50 million will be allowed to pay half the tax they are due to pay, which is wrong. These are not abstract figures but resources that in many cases are desperately needed to fund our schools, hospitals and infrastructure and to invest in both job creation and retention and to protect Ireland from the negatives impacts of Brexit.

There is also uncertainty about how the scheme will be monitored when obtaining a knowledge development box, KDB, certificate. The invention by the company will have to be novel, non-obvious and useful. The terminology is extremely ambiguous. Therefore, who will determine which companies meet the conditions laid down? Will it be the Patents Office alone? It is also unclear how much tax will be forgone following the introduction of the KDB certificate.

How does the Minister expect Members to support the legislation when we do not know what liability the State will assume once it has been introduced? This is being done during the worst housing and health crisis ever in the State when most public services have been squeezed to the bone.

It is also unclear how many small and medium enterprises will make investments in research and development activities to avail of the proposed measure. As we are all well aware, it is the large corporations rather than SMEs that like to use these types of loopholes and which, in many cases, have the resources and ability to access them. It is stated in the roadmap for Ireland's tax competitiveness that we must place ourselves in the best possible position to become the country of choice for mobile foreign direct investment in a post-BEPS - base erosion and profit shifting - environment. Do we really want to introduce further loopholes to attract companies because of a cheap tax regime, while we hammer citizens with a litany of unfair taxes?

The Bill and the implementation of the knowledge development box, KDB, scheme will also require changes to the current patent process. It is unclear if the KDB certificate process will be cheaper than the patent process. I ask the Minister to address that issue.

The changes in the patent process will allow third parties to make written observations on a patent application to the controller before a patent is granted. Who are these third parties? It is startling and unbelievable that the Irish Patents Office relies on the UK patents office to provide a patent search report in deciding if an Irish patent should be granted. Will the Minister explain exactly why this is still the case? This scenario will surely have to be reviewed in the light of Brexit. When the Bill was drafted and the concept of a knowledge box introduced, the Brexit referendum had not yet taken place. Where does the decision on Brexit leave us? What specific action is the Minister taking to address the issue? It is also unclear whether the changes proposed in the Bill will have implications for the cost of a new patent. When will this be made clear?

Sinn Féin is sceptical about introducing further tax avoidance schemes. In the roadmap to which I referred reputation is regarded as a key pillar. Ireland's reputation was damaged considerably by the aptly named double Irish arrangement. In 2013, the Minister for Finance announced that we did not operate a tax haven, yet one year later he closed down the double Irish mechanism. I do not want our reputation to be damaged further by the introduction of a replacement scheme. Political parties and elected officials from across the political spectrum should, in the interests of the people they represent, ensure highly profitable companies are tax responsible and pay tax in a transparent manner at the appropriate rate of 12.5%.

There are two pillars, rates and regimes. As I indicated, Sinn Féin supports the 12.5% corporation tax rate provided tax is paid at this rate. As part of our all-Ireland strategy, we would welcome this rate even more if it applied on an all-lreland basis. Brexit will be a game changer and we need to be ready for it. In the past, our tax regime has been probed in the United States, Australia, Britain and, most recently, by the European Commission. It is important to note that knowledge development box-type schemes introduced in other jurisdictions are being examined, questioned and probed by other authorities.

A mature debate on Ireland's corporation tax regime and reputation is required. Sinn Féin wants Ireland to be a responsible member of the international community, with no clouds hanging over our tax reputation. The right of the Government to set its own tax rates, including the corporation tax rate, is one Sinn Féin has always defended, particularly in Brussels. However, the introduction of a research and development loophole and knowledge development box, with tax rates of as low as 6% and 6.5%, will leave another cloud hanging over us.

The evidence to date is that knowledge development boxes have been used internationally as a tax avoidance tool in many cases. This legislation will only entrench such a negative perception. There are fairer ways of encouraging investment in research and development than introducing a measure that will undoubtedly be used by some corporations to avoid paying taxes.

As the Minister will be aware, Sinn Féin introduced amendments to the legislation in the Seanad, some of which we will resubmit on Committee Stage and, if necessary, Report Stage because the Government has not addressed our concerns. I ask the Minister to address the points I have raised in the interests of restoring our reputation and ensuring we create a fair and equal society, particularly for businesses.

Deputy Richard Boyd Barrett

We are very strongly opposed to this Bill. The so-called knowledge development box is being sold as a reasonable incentive to small and medium-sized enterprises to develop our innovative edge. The implication is that the scheme will have a positive benefit on the domestic economy. This is the view expressed by the Government and the Fianna Fáil Party. I do not know what the Labour Party's position is as it is not represented in the Chamber. We will see what its Deputies have to say on how the knowledge development box will benefit small and medium enterprises.

The most recent figures available on the level of tax the corporate sector pays on gross profits refer to 2014, although I understand figures for 2015 will be available soon. The figures show the corporate tax code is full of loopholes that are being used to rob taxpayers of vital tax revenues that could be used to develop infrastructure and fund our universities, the most important locations for the types of innovation and technological developments that would benefit the entire economy. They are also being used to rob the State generally of the revenues it needs for investment in strategic enterprise and industry, infrastructure, public services, technological development and upgrading the education system to make it the real driving force of innovation.

What is being sold as something that is good for the economy and innovation is in reality a massive tax break for profit interests and members of the public need to know the scale involved. The 2014 figures show the corporate sector benefits from tax loopholes worth €35 billion. Gross pre-tax profits for corporations stood at €95 billion in 2014. However, after what are described as deductions and charges, the figure decreases to €65 billion, with further deductions of €4 billion made through another series of loopholes. This means the taxable figure is reduced by €35 billion through loopholes or tax breaks that do not benefit the economy or society. Before considering the introduction of further tax breaks, we must address the current loopholes that have created a gaping hole in the potential tax revenue of the State. Incidentally, the figures I have cited were provided by the Revenue Commissioners.

Large multinational corporations are engaging in aggressive tax evasion or avoidance, whichever term one wishes to use, and some major domestic interests are also benefitting from tax loopholes. It is now proposed to introduce another loophole. The idea that the purpose of the knowledge development box is primarily to benefit small and medium enterprise must be set against the definition of a small and medium enterprise. According to the legislation, a small and medium enterprise is a company with an income arising from intellectual property of less than €7.5 million and global income of less than €50 million. These are not figures we associate with small and medium enterprises. The companies involved will not be corner shops or start-up companies in the local enterprise centre. To set income thresholds of €7.5 million domestically and €50 million globally is to stretch the definition of a small and medium enterprise. Many large companies will benefit from this measure.

However, the bulk of small and medium enterprise in this country will not gain from it. The same old crowd will benefit. What is not clear is how the big multinationals who exceed the thresholds in terms of their global incomes will be prevented from benefitting. We are well aware that they can massage their incomes, and have done so, such that they pay no tax at all or pay less than 1% in tax. They are well capable, through the internal allocation and movement of profits, of reducing their incomes in order to avoid paying tax.

Leaving that aside, in terms of the thresholds, where are the safeguards to ensure big companies such as Apple, Google, Facebook and so on do not set up a number of small companies, or put in place arrangements with small companies that they help to set up, and channel innovations through them? It seems there is nothing to stop that. I suspect that is exactly what they will do. The one thing these companies are very innovative at doing is avoiding tax. They have shown a remarkable ability to navigate around tax codes, usually with the active collusion of the political establishment, as happened here, and possibly, on the part of Revenue, in terms of what happened in the Apple case, although that is not yet clear but certainly has to be examined. We will learn more about that from the investigation into the Apple case but that there was political collusion in terms of tax avoidance of that I have no doubt. That there was collusion in some form or another with Revenue in terms of these tax rulings is a possibility, at least. This is what we are dealing with. Against that background, we are introducing another tax avoidance loophole-incentive based around the notion of intellectual property.

In regard to "intellectual property", it was stated that we are in the world of intellectual property now because of technological invention. This is a very old idea. The Minister of State, Deputy Halligan, as somebody who comes from the left should understand this point. The idea that the entrepreneur's idea is the generator of wealth is not a new idea, rather it is an old idea, and a very right wing idea. The workers making the products do not matter and neither do the people in the call centres selling them. They are irrelevant. There is little value put on them but a lot of value on the person with the brilliant idea yet the person with the brilliant idea gets away with paying no tax while the poor workers producing or selling the products pay taxes at levels that are a multiple of that paid by these brilliant entrepreneurs. Where do most of these innovations come from? When one traces them back one finds that some of the biggest and most profitable companies in the world have effectively stolen the ideas for which they hold patents and generate huge profits from public institutions, such as, in the case of America, the military, or in our case, the universities. That is an important point. In Ireland much of the innovation comes not from the military but from our universities. When one traces back the origins of these intellectual properties which have made huge profits for private companies one finds that many of them were developed in universities rather than by the brilliant entrepreneurs who end up with profits that are incomprehensible and on which they pay no tax.

As a student of literature I must point out that up until the poet Wordsworth there was no notion of copyright. Wordsworth was one of the people who championed the notion of individual ownership of ideas.

Deputy Eamon Ryan

It dates back to Brehon law.

Deputy Richard Boyd Barrett

Yes but in a lot of societies and, to my mind, the more progressive societies, the idea that anybody individually owned an idea was considered nonsensical, and it is nonsensical because ideas are generated by society. People often claim the credit for them or they have the machinery to take out patents on them before anybody else and so they claim they own the idea. Now, we are proposing that such people will not have to pay any tax on the enormous profits they generate from supposedly their ideas. As I said, ideas are generated out of societies collectively.

I am against this proposal. I reiterate that every tax break given to for-profit entities reduces the amount of revenue the State has to put into the universities. I am for innovation, and very much for it. Our universities are starved of money. That is where the money needs to go. All we are doing is making things more difficult for our universities. Grants for postgraduates were cut and have still not been restored. These are the people who come up with ideas but we cut their grants and increased their fees. Funding for many of our third level institutions has been cut over the past eight or nine years. If we continue to give away billions of euro every year via tax loopholes to these companies we will have less money to put into the universities that could champion real innovation and socially useful innovation. What is a socially useful innovation? For a private company the criteria in terms of an innovation is will it make money and not will it benefit society?

Our money is being used to provide tax breaks. Do we want these resources to be given primarily to people who pursue profit or would we rather them go into public institutions that have some semblance of what is in the best interests of society as a whole, be that in relation to the development of renewable energies, new technologies or strategic industries that will benefit society? It should be the latter yet they are being starved.

We are joining in the race to the bottom and it makes me weep. We have been warning - the Minister of State, Deputy Halligan, was with us on this for many years - that Ireland is leading the race to the bottom in terms of corporate taxation, not in terms of the 12.5% rate but the average 6% rate that companies actually pay. Interestingly, the same percentage is chosen for the beneficiaries of the knowledge development box. As we know, a combination of small and medium-sized enterprises are paying 12.5% as against the big profitable corporations, which pay 2%, 1% or even less than that. In some cases, they are paying less than 1%. We led and continue to lead that race to the bottom, but we are now being out-flanked by the maniac Trump who wants to reduce it even further and by Prime Minister, Theresa May. In the North, Sinn Féin and the DUP have jumped into this space, with Sinn Féin calling for a 12.5% rate in the North and the DUP calling for a 10% rate.

Where does it end? Every time we give away money like this there is less investment available for the universities, public infrastructure, public services and so on. It is madness. We are handing over control of science, innovation and the economy and, increasingly society, to a tiny group of multinational corporations that are ingenious at making money and avoiding tax.

They are robbing other people's ideas and making money out of them. Moreover, they want to take over our universities and hold them hostage. Increasingly, they can because underfunded universities that do not get enough funding from the public have to go cap in hand to the private corporations begging for some money for research. The companies say they can give it as long as the research benefits them. That is what is going on. There is a creeping corporate takeover of our third level institutions. Some buildings in the third level institutions are named after billionaires in this country who in many cases became billionaires through aggressive tax avoidance. There are buildings named after Michael Smurfit, Anthony O'Reilly, Denis O'Brien and so on. Is this really what we want? It is certainly not what I want. I do not believe it is the basis of a sustainable economy. Responsibility for the sort of technological advancement and investment in science that we want is being handed over to people who see only dollar signs or euro signs. I absolutely believe we should reject this.

We oppose this, full stop. It is part of the race to the bottom. Even in its own terms, which I have said we reject, how can the Government stop the big companies setting up small front companies and exploiting the system? I do not believe it will be able to.

What does the Government mean when it says €7 million and €50 million are small sums? I could count on one hand — or probably on one finger in my constituency — the number of small enterprises that have an income of €7 million or €50 million in global profits. That is not small. Therefore, there is a sleight of hand. It will benefit the same old gang, who are already ripping us off at an astronomical level.

I do my best to ring the alarm bells about this stuff. This is an important debate. It will probably be ignored in the media narrative. These are very serious issues that need to be discussed. I do my best to ring a few alarm bells. We will see how that pans out.

Deputy James Lawless

The Deputy might get credit for inventing the alarm bells.

Deputy John Halligan

The Deputy's orations are always brilliant.

Deputy Mattie McGrath

I do not know what kind of a bell or dong I can wave after that. Deputy Richard Boyd Barrett is used to rattling the big bell that he has and throwing the toys out of the pram but he is entitled to his views. More power to him.

Deputy Richard Boyd Barrett

I apologise to Deputy Mattie McGrath as I must leave.

Deputy Mattie McGrath

No problem. Beidh lá eile againn. We can continue the debate elsewhere. We had many a good debate over five years when we were in the Technical Group together. It is very important that all views be heard.

It is very timely that we have this debate on the Knowledge Development Box (Certification of Inventions) Bill 2016. The Finance Act 2015 introduced a knowledge development box, KDB. One would think it was the KGB when listening to Deputy Boyd Barrett. He is not listening now. Tá sé ag caint leis an Acting Chairman. The Bill brings in an effective reduced rate of corporation tax of 6.25% for qualifying income derived from qualifying expenditure in the European Union by an Irish tax resident company. The KDB has been described as the first OECD-compliant KDB in the world, which means it is in line with international guidelines, the OECD Action 5 report, published on 5 October 2015, and specifically the OECD's modified nexus approach. As I understand it, the KDB is a way for national governments to encourage the commercial exploitation of intellectual property by offering generous tax breaks on the profits derived from that intellectual property. That is vital.

While we have had the saga and mess of the Apple tax, in respect of which a judgment is awaited, I, as a Deputy representing Tipperary, acknowledge the amount of foreign direct investment in Clonmel and in Dungarvan and Waterford city in the neighbouring county, the constituency of the Minister of State, Deputy Halligan. We value the investment. The companies have provided considerable employment. They provide reasonably good and very good jobs but also have a spin-off effect on the services industry. We have to nurture them and encourage them. There is little point in having the ideologies of the hard left and harder left. It is so hard now that kneecaps are nearly freezing. This is in the belief that we are going to encourage the big companies to nurture smaller companies. Deputy Boyd Barrett is hung up over the bigger companies setting up smaller companies to avail of the supports. It is fine if they do. From little acorns major trees grow. We must support that.

I agree with Deputy Boyd Barrett on one area. The €7 million limit is very high for small indigenous companies or community enterprises we may like to nurture. In this regard, a turnover of €7 is huge. As I understand it, the KDB is a way for national governments to encourage the commercial exploitation of intellectual property by offering generous tax breaks on the profits derived from that intellectual property. While it might not be perfect, this legislation is necessary and timely, as is the debate on it. Intellectual property might be very limited and scarce at the outset. We must remember the investment that must be made in any new patent, design or research and development. Considerable work, time and energy goes into it also. Therefore, we have to have a level playing field and a carrot-and-stick approach to encourage it.

The patent box regime was first introduced in Ireland, in 2000, and has since been introduced in many EU member states, including the United Kingdom, France, Belgium, Hungary, Luxembourg, the Netherlands, Spain, and Italy. Is it not nice to think in these troubled times in our European Union, albeit with Great Britain threatening to exit, that we led the way in this regard? Perhaps when the Minister of State, Deputy Halligan, and many other Ministers are lobbying their sister or brother Ministers throughout Europe, this might be one thing they will point to. We have had innovative ideas that have replenished our own economy. We have given ideas to other European states so they might nurture growth and take the baton or torch and run with it.

Together with the existing 12.5% corporation tax rate, research and development tax credit and depreciation allowances for capital expenditure on intangibles, Ireland provides a hugely competitive offering to international business. They would not be here otherwise. We have to be competitive. We cannot be so inward-looking and introverted that we bring down the barriers, especially with the onset of Brexit. We must expand, explore, encourage, initiate and beg, steal or borrow in asking the companies to come here to avail of the supports available. We must give the same kinds of support to small indigenous businesses, SMEs and sole traders. They will have difficulty getting funding because, as I have said, the limit is too high. We cannot lose sight of this in these dark times as we try to come out of this recession. We are being hit now with what is happening across the water and the associated reverberations throughout Europe and the world.

Deputy Boyd Barrett referred to US President Donald Trump as a maniac. That language should not be used in any parliament. Mr. Trump was elected as leader of the people of the most modern democracy in the world. They elected him and they deal with him. We should react only if he starts firing salvos at our people here or starts threatening to bring home companies that have been nurtured here, including with IDA grants. I have used an analogy before about walking into a yard. The Minister of State, Deputy Halligan, my colleague from Corcaigh who is present, Teachta Aindrias Ó Muineacháin, and mé féin go into a lot of houses and yards and meet dogs lying down. We look to see whether they are cross or will bite. I have been bitten three times during election campaigns. One does not go over and kick the dog. One slips in nicely and rings the bell. The dog may be asleep or lazy, or he could be an old, tired dog, but you do not kick him until he bites you.

That silly narrative has grown in this Chamber, especially on the left. People keep attacking because something does not suit their ideologies, liberal agendas and so on.

Despite the obvious incentives, we should be clear - I mean this, regardless of my welcome - on at least some of the ethical issues surrounding intellectual property rights. Discussing this issue is not the preserve of the AAA-PBP and the hard left. We all have that right. The ethical issues involved are evolving on an hourly basis. We must be ever ready to examine, explore and engage on them.

Professor Jørn Sønderholm has noted that intellectual property rights are a socioeconomic tool that create a temporary monopoly for inventor firms and enable them to charge prices for their innovations that are many times higher than the marginal cost of production. Deputy Boyd Barrett mentioned this matter frequently, although I did not hear other Deputies because I was at a meeting. We all have those concerns. Last night, I watched a video on Facebook of eight-year old children who were working in mines. Thank God for the power of Facebook and other such tools that allow us to see the exploitation of young people, the abuses, greed and naked slavery inflicted on people just to source and extract minerals out of the ground. The same applies to sweat shops. It is wholly unacceptable. We all need to be educated on this situation, given that we all shop in the same places and buy the wares produced in those sweat shops. We are all guilty, not only the Government and regulators, of turning a blind eye. Hear no evil, see no evil, speak no evil.

The prices charged raise broader ethical issues surrounding intellectual property rights. I was delighted that Deputy Eamon Ryan was able to remind Deputy Boyd Barrett that the models in question, despite not being in law, existed in Brehon times. They are not new creations. They were there fadó fadó.

In line with much contemporary literature on the ethical dimensions of intellectual property rights, the product type in question that would give rise to most concern is life-saving medicine. Indeed, I have just come from a Rural Independent Group meeting with a group of relatives of cystic fibrosis sufferers. I also met them last week in the AV room. I saw and listened to the horror and torture on their faces and in their voices as they read out letters from loved ones who had been dying. One lady had the drug Orkambi with her. She had a 14-year old. She sent a picture around the room showing him playing sports, running and doing everything else that he inevitably would not be able to do. Others had guilt about being alive when their siblings had passed away. Those families have been living through mental torture, so to leave that meeting and then have to try to balance it with the intellectual property rights of drug companies is difficult. How many companies did I mention were in Ireland? Maybe the one making this drug is not. How to balance its rights with the social good, life and death? How could any Government delay and procrastinate? People were given promises and we were all lobbied in the AV room last year. They were told that it would be January, then early February.

Not only the Government is involved, though. The out-of-control HSE has also been procrastinating for a long time. We met a group prior to that one regarding life-saving equipment on helicopters for rural areas. The Irish Community Air Ambulance, comprising volunteer doctors and paramedics, found €3.5 million from a donor to run the service for one year. Hey presto, the HSE did not trust the group's bona fides. This is the same HSE that will not perform due diligence or show enough compassion to consider these requests.

These are the ethical issues that we must try to address. They apply in the cases of life-saving medicines as well as other production types, but there is no comparison with a young child who is dying when drugs could save him or her. The drug in question cost €159,000 per year, but that is now down to €129,000. That murky big business has to continue after this debate, but the HSE has procrastinated so. My colleague, Deputy Harty, spoke about the lack of governance and the desperate need for same. The Taoiseach told us that the governance was fine, but it is not. There is no governance. The people who need these drugs are trying to survive. Parents have needed to come to Leinster House tonight, last week and regularly when they should be at home with their sick loved ones. It puts our passion and engagement in perspective when we debate these ethical concerns.

Will the Minister of State give us any guarantee that, if the State offers generous terms to the development of intellectual property, issues such as this one will be addressed and form part of the broader conversation on the Knowledge Box Development (Certification of Inventions) Bill 2016? They must be. The Minister of State has an important role, given his dealings with schools and wider education. He has travelled half the world in recent times. Deputy Boyd Barrett was critical of him - the Deputy had looked on the Minister of State as a bedfellow on the hard left for many years - and said that he would not be open to change. The Minister of State will be open to change, though. He has to be. When one goes from this side of the House to that side, change occurs. That change is difficult to handle. I have never been on that side of the House, nor do I want to be, but the Minister of State must deal with the system, the Cabinet and the administration of the State, warts and all. I have some appreciation of how difficult it is from our briefings with the Minister of State and the Ministers, Deputies Ross, Naughten and Zappone.

The Bill and this debate are necessary. The knowledge development box was introduced in the Finance Act 2015 as a tax incentive to encourage innovation and research and development. Under the initiative, a corporate tax rate of 6.25% will apply to profits from intellectual property and assets that result from research and development carried out in Ireland. Research and development work has never been more vital. We must send out the message that we want more research and development and will give more grant aid to support the companies involved. I know some young innovators who are finding it difficult to access that funding.

The Finance Act provides that a number of distinct categories of intellectual property qualify for the knowledge development box - copyrighted software and patented inventions that share the characteristics of patents, in that they are novel, non-obvious and useful. Everything designed is novel to the person designing it and beauty is in the eye of the beholder. The people involved might be intellectually able. They have to be the thinkers, creators and thought provokers who can get their ideas out there, perhaps with others in companies. This is why some of the larger companies might invest. Deputy Boyd Barrett claimed that this would be bad, but it would not be. People will have ideas and research them for years, but they are not bankers. They do not have the accountants, design artists, specialties or qualifications necessary to bring their ideas that bit further. We must encourage linkages and be available to help the person with the idea. The man or woman who never made a mistake never made anything. It is important that people, including young people, be encouraged. I missed the BT Young Scientist and Technology Exhibition this year, although I have attended it every other year. I have seen the innovation in our schools. Mar focal scoir, it is very timely that we are having this discussion. We must have more debate on the issue and fully educate ourselves on it.

Debate adjourned.