Cowen delivers shot in the arm for R&D


6 Dec 2007

Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Pin on PinterestShare on RedditEmail this to someone

Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Pin on PinterestShare on RedditEmail this to someone

Finance Minister Brian Cowen’s decision to increase the base year for calculating tax credits on research and development (R&D) expenditure until 2013 will provide much needed incentives for SMEs and multinationals to invest in creating new products and services, business organisations agreed.

Cowen said the base year for spending used to calculate expenditure on R&D is being fixed at 2003 for a further four years to 2013.

He said: “Ireland is now viewed by multinational companies as a location for R&D activity and these changes to the R&D tax credit scheme help further embed these companies in Ireland around such high-value-added activities.

“I propose to enhance the R&D tax credit scheme. The base year for expenditure used to calculate expenditure on R&D is being fixed at 2003 for a further four years to 2013.

“The change will provide an additional inventive for increased expenditure on R&D in future years and it will offer more certainty to industry in relation to the tax credit scheme. This improvement will cost €60m in a full year and is an essential complementary measure to government spending on science, technology and innovation,” Minister Cowen said.

Joan O’Connor, tax partner, for technology, media and legal services at Deloitte, described the expansion as “positive for technology, science and pharmaceutical companies in the context of what the Government is trying to do in developing Ireland as a knowledge-based economy”.

However, she said that while the expansion was definitely a step in the right direction, what SMEs and multinationals would really prefer would be an abolition of the base year altogether.

Currently, if a company increases its expenditure on R&D it obtains tax credits for 20pc of the incremental part of that expenditure from year to year and from a 2003 base. There has been a three-year window as each year progressed so, for example, when 2007 was reached, 2004 would become the next base year, and so on. The minister said the base will still be maintained at 2003 levels until 2013, and on the incremental basis.

“Abolition of the base year will be the next lobbying step,” O’Connor said. “For companies that had R&D expenditure in 2003 they can only get 20pc on their incremental spend since then. What these companies would rather would be 20pc on any given year.

“The minister’s changes best benefit a company that spent nothing on R&D in 2003, but if a company had a high R&D spend in 2003 the benefits are small.

“However, it is definitely a step in the right direction. Unlike last year, he didn’t leave it stand. But what we would really like him to do is abolish the base year so that firms can look at what they spent and compute the credit at 20pc.”

The American Chamber of Commerce in Ireland, which represents over 600 US firms in Ireland that employ 100,000 people, echoed O’Connor’s sentiments about the base year.

“Committing to hold the base at 2003 levels for 10 years is a significant concession,” said Pat Wall, chairman of Tax Policy for the American Chamber of Commerce. “The measures will encourage companies to increase R&D expenditure on an incremental basis to 2013.

“However, the incremental approach to R&D tax credits is a passive initiative that is not having the desired impact of directly promoting R&D investment in Ireland. The benefit of such incentives will remain intangible until at least 2013 when a retrospective evaluation can be made.

“A volume-based approach would be more beneficial where tax relief is provided directly on the total annual R&D spend undertaken within a specific reference period by industry in Ireland. This would stimulate greater research investment by Irish based multinationals,” Wall added.

“However, of greater value to our economy would be a series of measures designed to directly enhance Ireland’s attractiveness to foreign direct investment,” said Wall. “The minister needs to implement a root-and-branch review of the financial incentives that can be brought to bear in this regard.”

Tech firms organisation ICT Ireland, however, welcomed the Government’s decision to set the base year at 2003. In addition, it welcomed the additional €12m for higher-education research.

Director Kathryn Raleigh said: “These R&D measures will help to increase R&D activity in both foreign-owned and indigenous technology companies.”

Raleigh warned, however, that a major opportunity to address teaching and support of science and mathematics at junior and senior cycle has been missed.

“The Government missed a valuable opportunity to specifically support the teaching of these subjects. Without extra investment and a refocused strategy we will fail to engage and excite our young students and recover our former high levels of achievement.

“At a time, when there are signs of a slowing economy, it is crucial to invest in the education of our young people,” Raleigh continued.

“The Government must support a long-term and strategic investment in education. Ireland needs to develop new a learning experience for our students so they can play a bigger role in today’s global knowledge society,” Raleigh said.

By John Kennedy