Deloitte’s Tax team look the impact of Budget 2012 on the Life Sciences industry in Ireland, including research and development tax credit, corporation tax regime, VAT and pensions.

Corporation tax regime

Despite having come under significant pressure over the last 12 months, the Minister has once again reaffirmed Ireland’s commitment to the 12.5% corporation tax rate which is the cornerstone of Ireland’s industrial policy and the foundation of the country’s future growth. 

Allied with numerous tax incentives targeted at the Life Sciences industry, such as generous Research & Development tax credits, an Intellectual Property regime and a wide treaty network, Ireland is still very much an attractive location for Life Sciences companies to conduct business.

Action:   

• Review your company’s global activities to determine if your organisation is maximising the benefit of Ireland’s corporation tax rate.

Research and development tax credit 

The budget contained a number of specific tax incentives which broaden the existing R&D tax credit regime. Firstly, the R&D tax credit is being amended whereby the first €100,000 in research and development expenditure will benefit from the 25% R&D tax credit on a volume basis. The tax credit will continue to apply to incremental R&D expenditure in excess of €100,000 as compared with such expenditure in the base year 2003.

In addition to this, the current outsourcing rules for R&D tax credits are to be amended. At present, sub-contracted R&D costs are eligible where they do not exceed 10% of total costs (or 5% in the case of sub-contracting to third level institutions).  These limits are being increased to the greater of 10% (or 5% as appropriate) or €100k.

These two changes are greatly welcomed and will be hugely beneficial to companies in the Life Sciences industry whether the R&D activities undertaken are outsourced or performed in-house. The changes are also particularly beneficial to small and medium sized indigenous Life Sciences companies.

Finally, companies in receipt of the R&D credit will have the option to use a portion of the credit to reward key employees who have been involved in R&D. It is envisaged that there would be no additional costs to the Exchequer as the bonus comes from the R&D credit already received by the company and the employee still pays the full tax liability on their other income. Although full details of how the incentive will operate have not yet been provided, this could be a beneficial method of providing a key employee with a portion of the company’s R&D tax credit to shelter part of their employment tax and could prove to be an additional benefit to attract, retain and reward key individuals in the Life Sciences industry.

Action:  

• Review the activities undertaken by your company to ensure that all qualifying expenditure incurred is benefiting from the R&D credit regime particularly in light of these positive changes.

New start-ups 

The three year corporate and capital tax exemption for new start-up companies in 2010 has now been extended for a further 3 years for companies starting up in 2012, 2013 and 2014. 

This extension is aimed at encouraging employment creation by rewarding new companies that create jobs.

Value Added Tax 

As indicated prior to Budget 2012, the headline change in taxation was the 2% increase in the standard rate of VAT to 23%.  This is effective from 1 January 2012. This measure will have little direct financial impact on the Life Sciences companies that predominantly deal in B2B transactions, where their customers have full VAT recoverability. Where the sale is made to a business that cannot recover VAT, consideration could be given to bringing about the circumstances necessary for invoicing a supply before the increased rate comes into effect.

The change could result in an unexpected increase in costs to a supplier where the sale is to a private individual or a non-VAT registered customer if the increase cannot be passed on in full. In addition businesses who supply telecommunication services, electricity or gas are protected to some degree from this risk as VAT is payable in accordance with the rate applicable when they issue their statement of account. 

However, other businesses engaged in the supply of continuous supplies of services can be impacted by the increased VAT rate even though they may have billed their customers before the rate change. This is because the tax point for VAT on ongoing services supplied to unregistered customers is generally the date of payment by the customer for the services provided. 

To avoid paying additional VAT the supplier may wish to issue their statement of accounts early so that payment will be received from the customer before the increased rate becomes effective or alternatively to delay issuing it until after the rate change so that it can be issued at the increased VAT rate.

Actions: 

• If you sell to the public or VAT unregistered businesses decide how you wish to approach billing and the rate increase.  If you supply ongoing services to private individuals remember you may be liable at the rate of VAT in force at the date of payment and not that at time which you billed. 
• Ensure your billing system is updated and capable of dealing with the change. 
•  Check that your contracts and websites are updated for the change. 
• Given that systems are required to be updated, it may be an opportune time to ensure your company is correctly charging the correct rate of VAT on its products and is claiming input credits where appropriate. 
• You may wish to review the sales model, to confirm that the optimal VAT treatment of your supplies is in place.

Reward and benefits

Special Assignee Relief Programme

In his Budget speech, the Minister announced that he will introduce a Special Assignee Relief Programme (‘SARP’) which will allow multinational companies to attract key people to Ireland. This is something that will be welcomed by employers and employees in the Life Sciences industry where international assignees play an important role in the success of the industry.

Over the last number of years following the abolition of the remittance basis of taxation, Ireland had lost its competitive edge, and attracting key talent was a real challenge as a result of the high rate of income tax vis-à-vis other jurisdictions. It is hoped that, when details are published, the programme will provide a significant incentive to encourage a skilled workforce to come to Ireland.

Foreign Earnings Deduction

A new Foreign Earnings Deduction will apply to companies where an employee spends a minimum of 60 days developing export markets in Brazil, Russia, India, China and South Africa. This is a positive initiative for the Life Sciences industry which seeks to further support Ireland’s export drive by aiding companies to expand into emerging markets.

Specific details are expected in the Finance Bill. However, it should be noted that a Foreign Earnings Deduction relief programme has existed previously in Ireland before being removed from the end of 2003.  This may give an insight into the intentions of the Minister.  Under the previous regime a proportion of employment income relating to workdays spent overseas could be excluded from taxation and the tax paid on this portion of income via the PAYE system could then be reclaimed by filing an appropriate tax return.

Pensions & Equity

Rather than further reducing tax reliefs as anticipated, Budget 2012 introduced changes that will see pensions, based on the Government’s projections, contributing an extra €57m in 2012 and €95m in subsequent years. The most important aspect for employers in the Life Sciences industry is the removal of the remaining 50% relief on PRSI that employers benefit from where employees make pension contributions. The other areas of change saw an increase in the imputed income distribution on individuals with ARF holdings greater than €2m from 5% to 6% and the introduction of imputed income distribution liabilities on vested PRSAs consistent with ARFs.

Despite the changes over the past year to the taxation of equity awards, the key positive after Budget 2012 is that there is still no employer’s PRSI on share based remuneration. However, you should be aware that grandfathering for employee PRSI purposes has been abolished and employee PRSI at a rate of 4% on the vesting of the share award, or exercise of an option, applies from 1 January 2012 regardless of when the award/option was granted.

Action: 

• Employers should now review their employee remuneration and reward packages in light of recent changes to determine whether the incentives in place are tax efficient and in line with best practice in the Life Sciences industry.

People to contact 

For assistance in relation to any issue highlighted above, please contact your local Deloitte advisor.