Dáil Éireann Debate, Tuesday - 7 December 2010
64 Deputy Chris Andrews asked the Minister for Finance if he will respond to claims by an organisation (details supplied) that investment and innovation will suffer as a result of ending a tax break on patent royalties, as contained in the four year plan announced last week and if he will consider reviewing this decision. [46006/10]
Amharc ar fhreagraThe tax exemption for patent income has been in place for over 30 years and has applied to income received by an individual or company from a qualifying patent subject, since 2008, to an annual limit of €5 million. A tax exemption has also applied, subject to certain conditions, to distributions paid by companies from exempt patent income. These exemptions have been abolished with effect from 24 November 2010. I do not believe that the removal of this relief will have a significant adverse effect on investment and innovation. The decision to abolish the relief was taken on the basis of a recommendation to this effect by the Commission on Taxation. The Commission found that the relief has not had the desired impact on innovation and R&D activity and that, despite various refinements to the scheme over the years, it was not a particularly well-targeted measure providing good value for money. Abolition of the patent income exemption will yield €50 million to the Exchequer in a full year and this is provided for in the National Recovery Plan.
As part of its review all tax expenditures, the Commission on Taxation examined the relief for patent income to determine if its continued operation was justified on cost benefit grounds. The Commission concluded that the relief has not resulted to any great extent in companies carrying out R&D activity and that the relief was being used in some cases by companies as a tax avoidance device to remunerate employees. Indeed, changes have had to be made to the scheme over the years to counter abuses as they have arisen. The Commission considered that there was a significant deadweight element to the relief and that it provided a windfall gain after a successful invention rather than an incentive to encourage new research and development.
The Government agrees with the conclusions of the Commission and believes that scarce resources should be focussed instead on the R&D tax credit scheme. The R&D credit scheme provides a more direct and effective incentive for enterprises to innovate and invest in R&D activities and the scheme has been enhanced considerably in recent years to make it one of the most competitive of its kind anywhere.
A tax credit of 25% of the incremental expenditure incurred by a company in an accounting period on R&D activities can be offset against a company's corporation tax liability. The scheme has been improved in most Budgets and Finance Acts since its introduction in 2004.
Finance (No. 2) Act 2008 contained a number of very significant enhancements to the R&D tax credit scheme including;
An option to carry-back unused tax credits for set-off against a company's previous year's corporation tax payments, if there is insufficient corporate tax liability in the current year, thereby creating a tax refund.
A further option, if unused tax credits still remain, to claim payment of the remaining unused credits which will be paid in instalments over a 3 year period.
Some of the expenditure on new or refurbished buildings used in part for R&D purposes will qualify for a tax credit, subject to a minimum level of R&D taking place there over a period.
The National Recovery Plan contains measures that will impact on all sections of Irish society. The abolition of the tax exemption for patent income would be less damaging to Ireland's competitiveness than, for example, an increase in the 12.5% corporation tax rate and the removal of the exemption is, perhaps, best seen in that light.
