Ireland’s Research and Development Tax Credit is regarded as one of the best in the world and has been in place since 2004. Under this system, companies can claim a tax credit of 25% on qualifying R&D expenditure. The purpose of the credit is to encourage both national and international companies to undertake R&D activities within Ireland.
While Ireland’s R&D credit is available to both national and international companies, it is of great significance to multinational companies (MNCs) as accounting policies allow for the credit to be accounted for “above the line” in the profit and loss account. Such a treatment impacts on the unit cost of R&D which is a key measure for MNCs when considering a location for their R&D projects.
Furthermore, as the R&D expenditure is an allowable deduction when calculating taxable profits, a company can in effect avail of an overall relief of 37.5%, calculated as follows:
|Corporation Tax Deduction||12.5%|
|R&D Tax Credit||25.0%|
|Overall Tax Relief||37.5%|
Qualifying for R&D Tax Credit
In order for a company to qualify for an R&D tax credit the following conditions must be met:
- The applicant must be a company
- The company must be within the charge to Irish Tax
- The company must undertake qualifying R&D activities within the European Economic Area (EEA)
- For Irish resident companies, the R&D expenditure must not qualify for a tax deduction in another territory
Qualifying R&D Activities
Under Irish Tax law, for an activity to qualify for an R&D Tax credit the activities must satisfy all of the following conditions. Activities must:
- Be systematic, investigative or experimental
- Be in a field of science or technology
- Involve basic research, applied research and/or experimental development
- Seek to achieve scientific or technological advancement
- Involve the resolution of scientific or technological uncertainty
Recent guidelines issued by the Revenue Commissioners acknowledge that resolving scientific or technological uncertainties can occur at various stages in the development lifecycle and on that basis they have indicated that areas of addressing functionality, scalability and integration constraints are included as qualifying R&D activities.
Qualifying R&D Expenditure
Qualifying R&D expenditure includes both revenue and capital expenditure, such as wages, related overheads, plant, machinery and buildings. Revenue have again recently clarified that qualifying expenditure in relation to indirect overheads are those that are “wholly and exclusively” relate to the carrying on of R&D activities.
Costs relating to the construction or refurbishment of a building for the purpose of R&D activities also qualify for the R&D credit, with proportional relief available where at least 35% of the building is used for R&D facilities.
Ireland’s R&D tax credit system also provides that:
– the greater of 5% of R&D expenditure or €100,000 can be outsourced to European universities and;
– the greater of 15% of R&D expenditure or €100,000 can be sub-contracted to other unconnected parties.
It must also be noted that companies are not required to hold the intellectual property rights resulting from R&D work, nor is there any requirement for R&D work to be successful.
Calculating the R&D Tax Credit
As outlined above, the R&D tax credit is calculated at 25% of qualifying expenditure for accounting periods commencing on or after 1st January 2015. For accounting periods prior to 1st January 2015 a base year restriction applied, i.e. the amount of qualifying R&D expenditure was restricted to incremental expenditure over expenditure incurred in a base year (2003). (This restriction was removed in the 2014 Finance Act.)
Taking a practical example of a company with qualifying expenditure of €500,000 in the year ended 31st December 2015; a tax credit of €125,000 would be available (€500,000 X 25%).
When calculating the qualifying expenditure, any grants received from the state, a board established by the state or any public, local authority or other agency of the state must first be deducted from the qualifying expenditure as such grants do not qualify for the credit.
Claiming and R&D Tax Credit
A claim for R&D tax credit must be made within 12 months of the accounting year end. For example, a claim for expenditure incurred in the year ending 31st December 2015 must be made before 31st December 2016. Successful R&D claims are first offset against the current year’s corporation tax liability, with remaining credits then offset as follows:
- against the preceding year’s corporation tax liability
- carried forward indefinitely
- allocated to another group member, if the company availing of the credit is a member of a group.
If a company still has remaining credits after the offset against the current and preceding years’ corporation tax liabilities, it may make a claim to have the excess repaid by the Revenue Commissioners in three instalments over a 33 month period.
The Future of Ireland’s R&D Tax Credit
The recent updated guidelines issued by the Revenue Commissioner on R&D Tax Credits confirm Ireland’s continued commitment to such a vital tax incentive. As outlined above, the ability of MNCs to identify a unit cost for R&D projects is a key measure when they are considering a location for their R&D projects. These tax measures, coupled with Ireland’s other benefits such as skilled workforce, pro-business culture and ease with which companies can do business are all fundamental to Irish subsidiaries of MNCs when competing for R&D projects.
If you would like further information on claiming an R&D Tax Credit or any other taxation matter you can contact us here.