A report on innovation commissioned by the Irish government has called for a radical overhaul of the country's system of R&D tax incentives. The taskforce that compiled the report was asked to look at how Ireland could become a global innovation hub.
The two-part report considered what help indigenous companies needed to create Ireland's own 'Silicon Valley' and how to attract foreign direct investment and talented people to Ireland.
The report argued that tax incentives for R&D should be based on volume rather than the incremental system which has been in place since 2004.
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"There have been tweaks to the R&D credit system year on year since its introduction. They have built and improved significantly on the initial regime introduced six years ago," said Mark O'Sullivan, a partner at Matheson Ormsby Prentice, who is based in the Irish law firm's Palo Alto office in California.
"In order to get investment into R&D the system needed simplification. The incremental system was complicated so a volume based system on a year to year basis should replace it," Anthony Smyth, a partner at William Fry Tax Advisers - Taxand.
The incremental system means that the R&D tax credit is calculated on the expenditure on qualified activities over the amount spent in the base year which is 2003.
The report also suggests that the remittance basis of taxation should be scrapped in favour of a 'mobile talent' regime.
"IP by its very nature can move from one jurisdiction to another very quickly, so can individuals. Our tax system should reflect this," said Smyth.
A Commission of Taxation report released last year appears to contradict the Innovation Taskforce. The commission suggested getting rid of the patent income exemption, while the taskforce wants to retain it.
"The Commission of Taxation report was looking at ways to increase revenues so wanted to remove the patent income exemption," said Smyth.
The Innovation Taskforce had a different agenda and is looking at increasing investment into Ireland in the long-term.
Advisers believe Ireland occupies a different position to other holding company jurisdictions that it competes with.
"Companies that come to Ireland, as opposed to other traditional holding company jurisdictions, are involved in real activities and have a real presence here," said O'Sullivan. "The likes of Google, Hewlett-Packard, Intel, Adobe and Microsoft have a real presence in Ireland. Ireland is looking to support companies that create jobs."
"Certain jurisdictions are focusing on IP. France has an attractive R&D regime but a high corporate tax rate and high social taxes for employees. The Dyson report [in the UK] was woolly and not grounded in much. It needed more detail," said Smyth.
Most advisers believe that the innovation taskforce report will be mentioned in the budget in December, although not in its entirety.
"The stand-out recommendation is to make Ireland more attractive for IP and the government might announce some measures in the budget," said O'Sullivan.
"Certain recommendations will be put in the December budget but probably not too much tax," said Gavin McGuire, head of tax at Eversheds O'Donnell Sweeney.
Ibec, a group that represents Irish business, welcomed the report.
"The immediate challenge is to ensure that the report's recommendations are implemented," said Danny McCoy, Ibec's director general. "Lasting benefits will be secured if the recommendations are supported by tangible commitments such as enhanced R&D taxation initiatives."
Olivia Lynch, the president of the Irish Taxation Institute, also endorsed the report.
"I welcome the recognition that Ireland's tax environment is central to innovation and jobs and much emphasis has been placed on new tax measures for intellectual property, R&D, the supply of venture capital and attracting mobile talent. However Ireland will only benefit if we move swiftly to introduce these measures," she said.
