R&D tax credit policy review presents job opportunity

• Ireland’s R&D tax credit is currently effective in attracting large scale corporate R&D investment into Ireland.  However, Ireland cannot become complacent and needs to increase the tax credit from 25% to 35% to stay ahead of threats from increased competition for FDI from other jurisdictions and the impact of international tax reform. 
• The cost to the Exchequer of increasing the R&D tax credit will largely be offset by extra tax revenues from job creation along with direct and indirect tax revenues from increased economic activity.
• More needs to be done to support and encourage R&D activity by the SME sector.  Past attempts to enhance the R&D tax credit for the SME sector failed to get past EU State Aid rules but Ireland can still put R&D tax credit measures in place to springboard the SME sector up to international R&D success standards. 

As part of our contribution to a public consultation by the Department of Finance on the R&D Tax Credit and Knowledge Development Box, KPMG conducted a survey of companies carrying on R&D activities in Ireland.  The survey results show that 85% of respondents believe that Ireland’s R&D tax credit offering currently compares well to R&D tax incentives in other countries. Ken Hardy and Damien Flanagan of our R&D Incentives team explain the survey findings below.

Ken Hardy, Partner in KPMG, says “We cannot emphasise enough the importance of the R&D tax credit in attracting FDI investment in Ireland.  Ireland needs to stay ahead of international competition and the impact of international tax reform by increasing the credit. This message was clear from the responses to our survey.  When asked what portion of R&D activity would take place in Ireland in the absence of the R&D tax credit, 50% of multi-national respondents said that two thirds of their current Irish R&D activity would be carried out elsewhere.  83% of respondents went to state that an increased R&D tax credit rate of 35% would see more R&D undertaken by their company in Ireland.”

An increase to the R&D tax credit does mean extra costs for the Exchequer.  However, Damien Flanagan, Partner in KPMG says “The cost of the tax credit must be evaluated in the context of the investment made by companies in Ireland in R&D.  For example, companies claiming the R&D tax credit, which cost €658 million in 2020, spent €2.6 billion on qualifying R&D expenditure, a large proportion of which is made up of the salary costs of workers engaged in R&D activity.

The expenditure of €2.6 billion doesn’t take account of costs such as support staff salaries, the cost of outsourcing which may not be claimable, and ancillary costs of running an R&D operation which all fall outside the strict definition of qualifying expenditure used for R&D tax credit purposes. Claimant companies spend a lot more than €2.6 billion, therefore the spill over impact of the R&D tax credit in the Irish economy is substantial and must be recognised when counting the tax cost of the credit to the Exchequer.”   

40% of respondents to KMPG’s survey were SMEs. Ken Hardy, Partner in KPMG, says "the most important aspect of the R&D tax credit identified by SME respondents is the cash refund element of the credit. More can be done through the R&D tax credit offering to support SMEs. The micro-SME sector were very disappointed when targeted enhancements to the R&D tax credit promised under Budget 2020 did not take effect due to EU anti-state aid rules. An increase to the R&D rate across the board for all R&D companies and greater flexibility in cash refund rules will be particularly beneficial for the SME sector and are less likely to give rise to state-aid concerns at EU level."

Our survey was conducted in May and elicited responses from 78 different Irish and foreign owned businesses who engage in R&D activities in Ireland.

The key points from our survey can be summarised as follows:

• 63% of survey respondents increased overall R&D expenditure over the last 3 years in Ireland with the same percentage planning on increasing R&D expenditure over the next 3 years
• 74% of MNCs responded that if the Research & Development tax credit was not available there would be a marked decrease (at least one third) on the current level of R&D activity that takes place in Ireland.
• 50% of MNCs said that without the R&D tax credit more than two thirds of R&D activity would likely move abroad.
• 83% of survey respondents believe that an increased R&D tax credit rate of 35% would see more R&D undertaken by their company in Ireland.
• 92% of survey respondents believed that an enhanced R&D tax credit rate of 50% would incentivise R&D of green technologies (e.g. solar, wind, hydro or biomass energy etc.).
• 85% of MNC respondents believe that the RDTC at least compares equally well to other regimes, with only 15% believing that Ireland’s R&D tax credit regime is less favourable to other schemes.
• The 25% rate and the availability of the RDTC as ‘cash back’ were the two most attractive features of the regime across all companies surveyed. However, for SMEs the availability of ‘cash back’ was No.1.

The pace of change is challenging leaders like never before. If you have any queries on the R&D tax credit, please contact our team below. We'd be delighted to hear from you.