Government introduces 20pc R&D tax credit

9 Jul 2004

After being created in the most recent Budget, the much anticipated R&D tax credit has finally been brought into existence by Finance Minister Charlie McCreevy TD who yesterday signed a commencement order.

In the Finance Act 2004, Minister McCreevy provided for a 20pc tax credit for additional expenditure on R&D that can be set against a company’s corporation tax liability. The Order made by the Minister for Finance appoints 1 January 2004 as the effective date for the operation of the provision.

The news will be welcomed particularly by overseas manufacturing companies already engaged in R&D activities, such as Nortel in Galway and the newly announced Bell Labs operations destined for Blanchardstown, Dublin. The tax credit will also help agencies like IDA Ireland accelerate their promotional activities aimed at boosting the presence of more R&D operations in Ireland.

Commenting on the new tax credit, Minister McCreevy said: “This Government’s economic and tax policies have delivered unparalleled employment and economic growth. It is important that we consolidate our gains and build on these strong foundations both in our general policies and by targeted measures. R&D is the key to a more knowledge-intensive economy aimed at providing a sustainable long-term basis for growth in employment and incomes.

“The tax credit for R&D will help to enhance our competitiveness as a location for new internationally mobile research-related investment, and will encourage existing overseas and indigenous firms to add research functions to their operations in Ireland or to increase their level of research activity.”

The scheme is an incremental one whereby expenditure over a defined base will qualify for the credit. For relevant accounting periods commencing between 1 January 2004 and 31 December 2006 the base will be R&D expenditure incurred in 2003. Thereafter, there will be a rolling one year base which is expenditure incurred on R&D in the period of 12 months ending three years before the end of the relevant period. The base will be calculated and apportioned on a group basis and a group can elect how to share the credit among group members. An amount equal to 20pc of the incremental spend apportioned to a company is then available to reduce the corporation tax of that company.

Expenditure on R&D is defined as expenditure incurred on R&D activities carried on by the company in the EU or the European Economic Area (EEA) in a relevant period. The expenditure must qualify for tax relief in the State and in the case of an Irish resident company must not qualify for tax relief outside of the State. The tax credit will not be available for royalty payments that are exempt royalty income in the hands of the recipient.

Capital expenditure on building or structure to be used for R&D is dealt with separately outside the incremental system, the Government says. The company will be entitled to a tax credit of 20pc of the cost of construction or refurbishment and this will be allowed over a period of four years as a credit against corporation tax.

The news was welcomed by Tánaiste and Minister for Enterprise, Trade and Employment, Mary Harney, who said: “The overall aim of the R&D tax credit is to encourage an increase in the amount of research and development carried out by companies and to make Ireland an attractive destination for foreign companies to commence or increase research and development. The strategy is designed to move Irish industry up the knowledge chain, something highlighted by the Enterprise Strategy Group as being of critical importance to the future health of our economy.”

She continued: “The regulations I am making spell out which research and development activities are or, are not, eligible for a tax credit. This distinction is very important to ensure that only the right type of research and development qualifies. Specifically, we are seeking to encourage activities which will contribute to an enhancement of the calibre of research and development in Ireland and create high quality jobs and opportunities for our workforce.”

By John Kennedy