Positive R&D tax credit changes included in Ireland’s Finance Bill

Pharma and life sciences tax news: Vol. 7, No. 15

Significant enhancements introduced include a repayment system for excess credits in addition to raising the credit to 25%. However, the window for making claims for 2007 and earlier periods is shortened to December 31, 2008.

Ireland's Finance Bill No. 2 2008 was published on November 20, 2008. This includes legislative proposals implementing the measures outlined in the October 14 Budget as well as detailing previously unannounced tax changes. These provisions are subject to amendments as the Bill passes through the various parliamentary stages before it is passed into law.
Other significant new measures not previously announced include a legislative regime for Revenue audits and tightening of deductibility rules for correlative adjustments.

R&D tax credit changes

The proposed amendments bring increased flexibility designed to permit, for the first time, the repayment of unutilized R&D tax credits. This will enable companies to take account of the total R&D tax credit up-front in any internal investment decision. This change, coupled with the increase in the rate of credit from 20% to 25%, is a welcome development to Ireland’s R&D regime.

In parallel with the improved regime applying from January 1st onwards, urgent action is required in order to make any outstanding R&D tax credit claims for 2007 or earlier years. The normal “four year look-back” rule for amending tax returns is being shortened to 12 months for R&D tax credit claims, meaning that any outstanding claims for years 2004 to 2007 must be filed by December 31, 2008. Revenue has confirmed that companies can make protective claims for repayment against any relevant open years in respect of such an R&D tax credit claim by December 31, 2008, and then follow up shortly afterwards with the claim details.

The main features of the R&D tax credit changes are as follows:

  • Repayment of excess R&D tax credits is now possible over a three year period. The repayment is limited to the higher of the total corporation tax payable by the company in the previous 10 years or the payroll tax liabilities of the company for the period in which the R&D expenditure is incurred.
  • It will now be possible to carry back excess R&D tax credits to prior periods generating a cash refund of tax paid.
  • Going forward, R&D tax credit claims must be made within 12 months of the end of the period in which the expenditure is incurred.
  • Claims for the R&D tax credit in respect of accounting years ending up to and including December 31, 2007 must be made by December 31, 2008.
  • The rate of credit will increase to 25% effective January 1, 2009, meaning an effective total tax benefit of 37.5% for qualifying expenditure.
  • The base year for determining the amount of incremental R&D expenses available for the tax credit is frozen at 2003 going forward. Therefore, for new investors or existing groups with no R&D expenditure in 2003, an effective “volume basis” applies.
  • The R&D tax credit on qualifying buildings has also been amended to allow for non-R&D use and to grant an immediate credit as opposed to spreading the credit over four years.

Other items of interest in the Finance Bill

Start-up companies

  • A new “start-up company” exemption from corporation tax (up to EUR120,000 of corporation tax in total) for the first three years of incorporation will apply to new businesses which have not been previously carried on in Ireland.

Double Tax Agreements (“DTAs”)

  • For transfer pricing correlative adjustments, relief for correlative adjustment payments may only be made via the provisions of the DTA.

Revenue Audit

  • The Bill proposes that the existing non-statutory Code of Conduct for Revenue Audits be put on a legislative footing and increases the level of fixed penalties for non-compliance.

Income Tax

  • Amends the tax residence rules so that individuals are regarded present in Ireland if present at any time during that day (previously this test applied at midnight only).
  • Provides a de minimis threshold for application of the Income Levy and a tiered levy rate; max. rate of 3% for income in excess of EUR250,120.