No more sacrifices

May 28, 2018

Sunday Business Post, 27 May 2018
One of the immediate effects of GDPR, the General Data Protection Regulation which took effect in Europe last week, is to remind us of just how many online subscriptions we have. 

We sign up to newsletters, merchant sites, publishers and God knows who else with a whimsical indifference to the knowledge and data we are surrendering to them.  We leave our electronic fingerprints behind us all the time.  The advent of GDPR has resulted in responsible companies from all over Europe getting in touch with those of us whose email addresses they retain on file.  They remind us of their existence while invariably assuring us that their record of our existence is safe with them.  Companies cannot take the reputational risk of failing to be good data custodians. 

Exempt from these new regulations are state agencies of all descriptions, including the Office of the Revenue Commissioners.  We probably don't need to be reminded of Revenue’s existence and they certainly never seem to forget about ours.  Opting out is not an option with Revenue.  But in addition to dealing with your tax affairs you can opt in to receiving Revenue briefings, reminders and bulletins which issue practically on a daily basis. 

Revenue Paranoia

One such bulletin in particular caught my eye this week.  Revenue tell us they are looking to hire external experts to help them police Research and Development (R&D) tax relief claims.  Revenue's paranoia about sharing anything remotely resembling taxpayer information outside the organisation is well-documented, but there are times when they have to have recourse to external, private sector expertise.  Dealing with R&D tax credit claims is one such occasion. 

Someone has to decide when high-tech development starts and stops, and indeed whether the development is sufficiently high-tech in its own right to warrant the tax relief claim.  Hence the Revenue need for outside specialists; scientists educated to doctoral level who can assess not in tax terms but rather in scientific terms what is actually going on in a company and whether some of it might be eligible for the tax break.

The R&D tax credit is one of the few survivors of the purge of tax breaks which was completed in 2011.  It's available primarily to companies.  R&D relief is of course of most benefit to businesses which are engaged in high-tech manufacturing.  Almost by definition, it is not available to more routine wholesale or retail industries.  The R&D credit rewards expenditure on the people, equipment and buildings required to develop know-how, patents and other forms of intellectual property – the new foundations of economic well-being, in much the same way as abundant natural resources were the foundations in the past. 

Unique

The R&D credit is unique for several reasons.  Not only did it survive the purge of tax reliefs but in actual fact it was extended.  More company investment qualifies now for the relief than had been the case in the past.  Secondly it is unique in that it is a benefit which can spill over to the employees of the company and reduce their personal tax bills, subject of course to terms and conditions.  And it is uniquely generous.  Every €4 of the spend that qualifies further reduces the company tax bill by €1.

These factors have made R&D claims very popular, and have resulted in significant tax reductions for the companies availing of the break.  Recent official figures suggest that some 1,500 companies have made successful claims each year for the past three years, at an Exchequer cost in excess of half a billion euros annually.  Tax largesse of that magnitude is hard to come by.  When a tax relief is this effective, you begin to fear for its safety. 

Despite the many tax regime change for companies made over the last decade, the Irish system is still perceived to have a whiff of cordite.  The elimination of stateless companies, the phasing out of the “Double Irish” tax deferral structures and the creation of one of the tightest tax reporting and regulatory regimes in the world have not rebuilt the country’s reputation as they should have.  That’s mainly because most of the criticism comes from our competitors, with some of the Europeans still calling us tax pirates.  Our politicians and officials shouldn’t be too thin skinned as pressure continues for further levelling of our allegedly skewed tax system.

Past Concessions

R&D relief in some shape or form is available in most developed economies.  By and large R&D tax breaks don't contravene the EU state aid rules.  The EU's own alternative tax corporation proposals, the so-called Common Consolidated Corporate Tax Base, has provision within it for R&D relief.  R&D tax credits scarcely received mention in last year’s Coffey Review of Corporation Tax except to note the scheme’s effectiveness in promoting the growth of research activity.  These factors should ensure its future.  But in Ireland, R&D tax relief is also the gateway to accessing the Knowledge Development Box tax relief, where eligible income streams get taxed at 6.25% rather than at the mainstream 12.5% tax rate. 

Past concessions in Ireland’s corporation tax regime have been largely ineffective in dampening international criticism.  By now there is little more left to concede.  There should be no more sacrifices made to secure the continued acceptance of the 12.5% regime which is about jobs as well as about tax yield.  The corporate sector was responsible for 1.9m jobs in 2016.  The recurring message from our industrial development agencies is the importance of growing our own multinationals, and the capacity for promoting research and development is critical to that. 

Businesses across Ireland are currently doing what’s necessary to ensure our reputation for data integrity under General Data Protection Regulations.  You’d have thought we had already done enough on the tax front.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland