IP tax incentives to form key pillar of Irish economic recovery plan

The Irish government recently announced improved IP tax incentives in the hope that Ireland will become a global centre for IP development, helping to kickstart the economy much as the International Financial Services Centre did in the early 1990s. The government is also reported to be close to announcing a plan, the key feature of which will involve a range of tax incentives to entice foreign companies to establish research and development (R&D) activities in Ireland and to foster the development of indigenous R&D. These will be in addition to existing tax incentives, such as the R&D tax credits and patent income royalty relief.

According to Taoiseach Brian Cowen:

"This will provide a major driver of Ireland's future prosperity. It will create high-quality and well-paid employment. What we must now do is create an economy that combines the features of an attractive home for innovative multinationals while also being a highly attractive incubation environment for entrepreneurs."

The government is drawing up the plan with a number of government departments and the state investment agencies Enterprise Ireland, responsible for the development of the indigenous business sector, and IDA Ireland, responsible for inward investment. While previous initiatives have tended to focus on biotechnology and pharmaceutical technologies, it is understood that the new plan will be more far reaching and will also target R&D in software and internet technologies, along with traditional businesses and franchise development.

The 2009 Budget and the recently published Finance Bill included an upgrade of the existing tax credit regime for R&D. The new measures announced include the following: 

• The rate of the credit will be increased from 20% to 25% of qualifying expenditure; 
• The base year for measuring incremental expenditure for the purpose of the credit for all future periods, which was due to roll over to 2004 from 2014, has now been reset as 2003; 
• Unused tax credits can be carried back for set-off against corporation tax paid in the previous accounting period and any unused credit may be refunded in instalments over a three-year period, thus allowing a company to gain the full benefit of the tax credit, including the benefit of a cash refund, in the early stages of the R&D activities; and 
• Certain expenditure on new or refurbished buildings used in part for R&D activities will qualify for the tax credit provided that such activities amount to at least 35% of all activities carried on in the building over a four-year period. At present, in order for such expenditure on buildings to qualify, they must be used wholly and exclusively for R&D.

Minister for Finance Brian Lenihan has said that the tax treatment of intellectual property will be further examined in 2009. He has instructed the Commission on Taxation, which is examining the entire Irish tax system, to investigate the options available to the government in relation to intellectual property. The commission is due to report to the minister in September 2009, making it likely that further IP innovations will be contained in the 2010 Budget or in the Finance Bill for that year.

Recent announcements have highlighted the attractiveness of Ireland as a location for R&D, with Houghton Mifflin Harcourt announcing a €350-million R&D centre and Boston Scientific investing €50 million in its Galway-based R&D centre. Meanwhile, Ireland hosts international bases for internet companies such as Google, Yahoo!, eBay and Facebook. These companies primarily use Ireland as a customer and language services provision centre, but may now be tempted to expand their operations to core product development.