The Government’s research and development (R&D) tax credit has played a key role in attracting multinational investment focused on innovation. There is, however, potential for it to do more, says Ian Collins, EY Ireland tax partner and lead of innovation incentives.
Collins says Ireland must adapt to increased interest from competing nations to make the R&D tax credit more enticing.
“Global competition in this space is intensifying,” says Collins. “EY’s 2024 Worldwide R&D Incentives Reference Guide highlights how many countries comparable to Ireland have become highly competitive and represent a growing threat to Ireland’s position when vying for foreign direct investment.
“Countries such as Canada, Australia, the United Kingdom, Germany and Singapore have recently enhanced their R&D tax regimes. For example, Australia’s R&D tax incentive offers SMEs a 43.5 per cent refundable offset, while Canada currently offers a 35 per cent refundable tax credit on eligible R&D costs for SMEs, and 15 per cent non-refundable for larger firms.”
At present the Republic offers a 30 per cent credit, although in real terms this amounts to more like a 42.5 per cent benefit when standard tax credits are included.
“Given this global competition for investment, Ireland cannot be complacent, and an enhancement of the Irish R&D tax credit rate at this point in time would be appropriate to maintain competitiveness, especially given the scope and pace of other international incentive regimes and wider geopolitical uncertainty,” says Collins.
“Improving our R&D regime should greatly increase the attractiveness for FDI and incentivise greater levels of SME R&D activity, including first-time participants.”
This is a view shared by Deloitte. In its recent response to a public consultation on the tax credits, the professional services firm said spending rules around the tax credit should be relaxed. In particular, it said it wanted more of the spending associated with engaging partner firms or universities to count towards receipt of the credit.
This focus on engaging partners makes sense when the need for increased research into new technologies is taken into account.
“As the pace of technological innovation continues to increase it is evident that the growth and competitiveness of global economies is inextricably linked with innovation activity. Over the last number of decades, Ireland has rapidly evolved into an outward-looking, globally significant economy with a highly educated and diverse workforce,” says Collins.
“Ireland has witnessed unprecedented growth attributed to FDI and the scaling and growth of innovative indigenous enterprises. A significant underpinning factor for Ireland’s success is the research, development and innovation activity undertaken here, coupled with our highly educated workforce. We need to continue down this path and ensure we avoid complacency when it comes to our competitive offering.”
Essentially, to be a relevant player at the table when vying for future investment in R&D, Ireland needs to present an offer that is attractive both to existing businesses here and potential future sources of FDI. This goes beyond the financial upside; it also needs to address the scheme’s administrative aspects.
“Industry feedback, particularly in the case of SMEs, indicates concern regarding the potential for onerous administration when submitting claim documentation,” says Collins.
“It is often perceived as unjust that an SME is expected to maintain the same level of documentation as a multinational. Measures to reduce the volume of documentation required and streamlining the process for making claims would be welcomed and in turn it would be expected to support a greater volume of companies accessing the regime”
There is a model already in place that could be replicated. The IDA Ireland and Enterprise Ireland R&D grants processes are designed to be simple to both understand and engage with.
Collins is confident that finding a more simplified and attractive route is possible as there is a clear willingness at both government and department level to make the R&D credit more attractive.
“There are a number of fundamental improvements to Ireland’s R&D tax credit offering that could position Ireland top of the ranks when competing for future R&D investments. This would include aligning the definition of innovation relative to what is considered qualifying R&D activities, particularly in light of the rapid technological change under way due to the advent of AI,” he says.
