The new Government here is in a rare and enviable position. Despite the ongoing risks to our economy from global uncertainty and policy changes in other countries, the State boasts a significant budget surplus and remains close to full employment.
This is the result of decades of strategic policy making and attracting investment through the nurturing of a highly skilled workforce and targeted tax incentives. We are in a strong position, and it is ours to squander or to sustain.
Do we allow our competitive advantages to be eroded, or do we use this moment to reinvest in policies that futureproof our success?
A key factor in the country’s stability is the tax revenue generated by the sustained performance of our economy. But as we move forward, the focus must shift from merely collecting windfall taxes to ensuring we have a solid, reliable and even greater tax base.
With global tax reforms, intensifying competition and shifting corporate strategies, Ireland is under pressure to rethink the country’s tax framework, and this includes an upcoming review of our R&D tax credits and incentives.
Signposted in last year’s budget, the intention is to review how Ireland uses our tax credits to support innovation and to analyse how we compare internationally.
That may sound technical, and it is, but it is also vitally important as the companies our economy and society rely on are increasingly recalibrating their investments towards jurisdictions offering more forward-thinking incentives.
Our 12.5 per cent corporate tax rate was once our ace card in attracting multinationals, but with the OECD’s Pillar Two reforms setting a global minimum of 15 per cent, that hand has been played.
The challenge now is no longer about bringing in jobs – it is about ensuring that the intellectual property (IP) underpinning global innovations is created and grown in Ireland, and this requires doubling down on our important role as a leader in the knowledge economy.
Our focus needs to move to qualitative incentives that boost genuine innovation and keep our competitiveness sharp and long-lasting.
The problem is that Ireland’s current R&D tax credit remains rooted in a way of thinking more suited to the 1990s than the 2020s or even beyond. It is tethered to physical presence and employment, an approach increasingly out of step with wider global shifts and one that risks making us less attractive given the global tax changes and our housing supply crisis.
More sophisticated tax credit mechanisms are increasingly being offered by other jurisdictions. Countries such as Belgium have modernised their policies to reward companies that generate and centralise IP within their borders, regardless of where the R&D occurs.
Life science and technology companies, for example, have shifted the locations from which they co-ordinate their R&D due to these changes. These competitor jurisdictions have functioning patent box regimes and their tax credits cover development costs irrespective of where the initial development takes place. This creates an incentive to allow firms to modernise and invest and it is something Ireland lacks. Our innovation edge has been blunted.
The UK has enhanced its R&D tax credit system to include credits for both British operations and international operations working on particular projects such as clinical trials. In addition, the UK offers a patent box regime that allows companies to pay a marginal tax rate of 10 per cent on profits derived from using the IP it is generating.
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Ireland’s system is much more rigid. If a company conducts global R&D, but wants to centralise IP here, the tax incentives are not as compelling. This makes it more attractive for firms to locate their next generation of IP in higher-tax jurisdictions where they can offset tax liabilities through more favourable incentive structures.
Speedily amending our current policies to allow related-party R&D expenditure to be included within companies’ claims – while imposing limits and restrictions to protect the exchequer – could allow Ireland to maintain its position as a global hub for IP.
In addition, we must introduce new incentives, particularly in the areas of digitalisation and automation. Countries such as Spain and Luxembourg have been introducing digitalisation tax credits to encourage businesses to invest in technology that can improve operational efficiencies, and we cannot lag behind.
Spain, for instance, offers corporate income tax credits covering up to 50 per cent of digitalisation investments for SMEs, while Luxembourg provides grants for businesses implementing AI-driven automation.
To increase our competitiveness, the Government should also consider introducing a tax incentive programme that supports businesses in their decarbonisation efforts. This would include tax credits for companies investing in green technologies or adopting more sustainable business practices.
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Ireland finds itself at a critical juncture The country has enjoyed a period of impressive economic growth based on agility and strategic policymaking. That same approach is needed now, but with a more sophisticated mindset.
The country has distinct strengths but the choices we make now will shape the next phase of our economic story. And the numbers must stack up.
A proactive, ambitious plan from Government will send a clear and important signal that Ireland is not just keeping up – it is setting the pace.
Cathal Noone is a partner at Deloitte Ireland
