Deloitte analysis on corporation tax and Budget 2012
Introduction
On a positive note, the Minister has once again reiterated the Government’s commitment to maintaining the 12.5% corporation tax rate. In the context of the global economic downturn, and with recent corporate tax increases in countries such as France, it is very positive that the Irish Government continues to reiterate its commitment to maintaining the 12.5% corporate tax rate. The low corporate tax rate is the cornerstone of Ireland’s industrial policy and the Minister has once again provided reassurance to both indigenous companies and multinationals operating in Ireland in relation to the future rate of corporation tax.
Clearly the Minister is conscious that further focus is required in the area of job creation and also in the knowledge based economy to maintain our competitiveness in the international markets. In this regard he has announced some targeted measures specifically designed to create jobs.
Firstly, the Minister announced a new Foreign Earnings Deduction for exporting companies and the expansion of the existing R&D tax credit regime.
Secondly, in an effort to encourage entrepreneurship and to create new employment, the three-year tax exemption for start-up companies was extended for companies that commence a new trade in 2012, 2013 and 2014.
Corporation tax rate
We welcome the Minister’s reaffirmation of Ireland’s commitment to the 12.5% corporation tax rate. This should provide certainty to new and existing companies in relation to the future rate of corporation tax.
New start-ups
The three year corporate and capital tax exemption for new start-up companies in 2010 has now been extended for another three years for companies starting up in 2012, 2013 and 2014. This change is aimed at encouraging employment creation, rewarding new companies that create jobs. Although this extension is welcomed, there is little evidence to suggest this incentive is having a significant impact on the creation of new jobs.
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 to further support Ireland's export drive by aiding companies seeking to expand into emerging markets, although as of yet it is not clear how this new incentive will operate. We look forward to the release of further detail regarding this new incentive.
Innovation, intellectual property and R&D
Over the last number of years, there have been significant improvements to Ireland’s R&D tax credit and intellectual property regimes. The Budget contained a number of specific tax incentives which broaden the existing R&D tax credit regime which should continue to give Ireland’s smart economy a competitive tax advantage in the international arena. The new changes should also provide a boost to small and medium sized indigenous companies engaged in research and development activities.
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). This limit can disproportionately affect smaller companies which may have greater need to outsource R&D work than larger multinationals with greater internal resources. The outsourcing limits for sub- contracted R&D costs are being increased to the greater of 10% (or 5% as appropriate) or €100k.
These two changes are greatly welcomed and will provide a targeted benefits to small and medium sized indigenous companies in particular. However, as the R&D tax credit continues to be calculated on an incremental basis (for expenditure over €100k) over a base year of 2003 for all companies, companies who had a significant R&D spend in the base year of 2003 continue to be penalised as they may not be in a position to benefit from R&D tax credits.
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 wouldbe no additional cost to the Exchequer as the bonus comes from the R&D credit already receivedby the company and the employee still pays the full tax liability on their other income.
It is not clear how this new incentive will operate and we look forward to the release of further information. This could be a very beneficial way 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.
