1 R&D. Tax incentives An IDA Perspective on Research & Development Leo Clancy, 10th September 2014. Where does IDA Fit? Department of Jobs, Enterprise & Innovation Building Irish Supporting Indigenous Supporting Multinational Academic Base Irish Companies Companies in Ireland 1. IDA Ireland Business Focus Information Communication Technology Global Business Services Life Sciences & Food High Value Engineering, Industrial &. Manufacturing Clean Industries Content Industry, Consumer Research, Development & Business Services & Innovation International Financial Services 3. Why is R&D Important? 4. Agency Supported Foreign Owned Companies ..directly employed 172,326, and a further estimated 124,000 indirectly in 2013..contributed 72 percent to total corporation tax revenues in 2012..spent billion on materials and services sourced in Ireland (2012).
2 Invested just under billion in R&D (2012) equating to over 70 percent of all business expenditure on R&D. Source: Policy Statement on Foreign Direct Investment in Ireland, July 2014 5. 2. IDA Ireland's Core Value Proposition 6. R&D Tax Credit 2004 2011. Business Expenditure on R&D Tax Credit Paid 261M. # of Beneficiaries 75 ~1,500. Source: Department of Finance, Review of R&D Tax Credit 2013 7. Direct State R&D Spending & Related Support Academic Infrastructure SFI & Technology Centres Innovation Partnerships Feasibility Studies Enterprise R&D Grants Innovation Vouchers Commercialisation Fund Fellowships (IRC / SFI). Horizon 2020 Supports SFI Spokes & Partnerships .and others Source: State Investment in Research & Development, Forf s, November 2013 8. 3. Direct State Investment in R&D, 2004 to 2013. Source: State Investment in Research & Development, Forf s, November 2013 9.
3 In-house R&D Spend and Employment (IDA Client Companies). 12,000 1,400. 1,200. 10,000. 1,000. 8,000. 800. 6,000. 600. 4,000. 400. 2,000. 200. 0 0. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012. Total R&D Employment (LHS) Total R&D in-house Expenditure m. Some Simple Ambitions for Irish R&D. More R&D (Volume & Participants). Increased Collaboration & Connections Local Development & Commercialisation Reputation for Delivering Research Excellence Sustainable Economic Impact 11. 4. To learn more log on to +353 1 603 4000. 5. 6. 7. 8. Optimising your R&D. incentives 10 September, 2014. 9. Agenda The R&D incentive in the current environment Overview of the R&D regime The science test The accounting test Overview of documentation requirements Putting a framework in place How to prepare for a Revenue audit Page 27 10 September 2014 Optimising your R&D incentives The R&D incentive in the current environment The R&D incentive in the current environment Key improvements in recent years: Cash refunds for excess R&D credits from Irish Revenue 1st 100K/ 200K/ 300K on a volume basis Use credit to reward key R&D employees Very successful regime: Encouraging growth in R&D spend in Ireland 2003 R&D spend was of GDP increasing to of GDP (2011).
4 The EU 2020 target for Ireland is of GDP. Greater flexibility around refunds Department of Finance Review published The R&D tax credit regime is October 2013 a fundamental cornerstone to building Ireland as a cost Government's commitment to maintain the competitive knowledge economy R&D tax credit Among best in class' internationally Page 29 10 September 2014 Optimising your R&D incentives 10. The R&D incentive in the current environment Company is 25% Credit available on qualifying incremental R&D expenditure profitable and Allowable against Irish corporation tax paying Irish Where excess credit is available the tax excess will be refunded per below Company in 25% Credit available on qualifying incremental R&D expenditure losses and Available as Cash Refund declares Nil Refunded over three years Irish tax Page 30 10 September 2014 Optimising your R&D incentives The R&D incentive in the current environment Example of tax credit/cash refunds Corporation Tax liability y/e 31 December 2013 100,000.
5 R&D tax credit 500,000. Excess R&D tax credit available for repayment 400,000. Repayment of the excess R&D tax credit of 400,000 is as follows: Excess R&D tax credit payable no earlier than 1st Instalment (33%) 132,000 23 September 2014. 2nd Instalment (50% of balance) 134,000 23 September 2015. 3rd Instalment (remainder) 134,000 23 September 2016. Page 31 10 September 2014 Optimising your R&D incentives The R&D incentive in the current environment Example of tax credit/cash refunds (cont'd). 31 Dec 31 Dec 31 Dec 2013 2014 2015. Excess R&D tax credit for repayment 400,000 400,000 400,000. R&D tax credit not repayable before R&D Tax Total Due 23 Sept 23 Sept 23 Sept 23 Sept 23 Sept Credit 2014 2015 2016 2017 2018. FY13 400,000 132,000 134,000 134,000. FY14 400,000 132,000 134,000 134,000. FY15 400,000 132,000 134,000 134,000. Total 1,200,000 132,000 266,000 400,000 268,000 134,000.
6 Page 32 10 September 2014 Optimising your R&D incentives 11. Overview of R&D. regime Overview of R&D regime Key highlights Qualifying R&D project with 20% grant aid: R&D spend of 100. Grant aid (20). Net of grant aid 80. CT deduction @ (10). R&D credit @ 25% (20) (30). Net cost 50. Significantly reduces net cost of doing R&D in Ireland Accelerate investment provide a budget to pay for targeted hires Increase ROI on R&D spend Increase margins on qualifying projects Can account for the R&D tax credit above the profit line Page 34 10 September 2014 Optimising your R&D incentives Overview of R&D regime Key highlights (cont'd). Credit in addition to corporation tax deduction tax relief on net of grant expenditure How is relief obtained: Credit to be offset against current year corporation tax liability Excess R&D tax credits can be carried back and offset against corporation tax paid in the previous year Claimed on corporation tax return Cash refunds for excess credits Claims must be made within 12.
7 Months of the period end The introduction of a cash refund scheme can offer significant cashflow and financial statement benefits Page 35 10 September 2014 Optimising your R&D incentives 12. Overview of R&D regime Key highlights (cont'd). Limits on subcontracting costs capped at the greater of: Up to 5% (University or Institute of higher education) and 10%/15% of qualifying in- house R&D spend where subcontracted to an unconnected third party respectively, or 100,000. For 2012 onwards, onus on principal to claim the R&D benefit and notify subcontractor in writing Insert clause in contract terms Letter of notification etc. Form CT1 panel to be completed Always bear in mind the 25% incentive when negotiating with R&D. subcontractors Page 36 10 September 2014 Optimising your R&D incentives Overview of R&D regime Key employee Must be 50%.
8 Involved in R&D. Cannot be Poor director or uptake connected to director Key Employee Cannot Claw-back have >5%. provisions shareholdin g Effective Capped at income tax corporation rate cannot tax liability be <23%. Page 37 10 September 2014 Optimising your R&D incentives Overview of R&D regime Key Finance Act ( ) 2013 changes Increase volume base credit from 200K to 300K. Outsourcing limits for unconnected third parties increased from 10% 15%. Key employee claw back provisions onus now on the company Pre Finance Act Post Finance Act ( ) 2013 ( ) 2013 Difference . In-house R&D expenditure 1,500,000 1,500,000 Nil Subcontracted R&D expenditure* 150,000 225,000 75,000. (10%)/(15%). Base Year R&D expenditure 2003* (100,000) (0) 100,000. ( 200K/ 300K volume basis). Qualifying R&D spend 1,550,000 1,725,000 175,000. R&D tax credit 387,500 431,250 43,750.
9 *Subcontracted expenditure 300,000 Base Year expenditure 300,000. Page 38 10 September 2014 Optimising your R&D incentives 13. Science test Science test 5 Tests R&D activities means: 1. Systematic, investigative or experimental activities 2. In a field of science or technology 3. Being one or more of the following categories of R&D: Basic Research (experimental/theoretical work without a specific objective). Applied Research (work undertaken for a specific objective) or Experimental Development (producing new/improving existing, materials, products, devices, processes, systems or services including incremental improvements thereto) It's not just people in white coats in labs that qualify! Page 40 10 September 2014 Optimising your R&D incentives Science test 5 Tests (cont'd). 4. 5. Scientific or technological Scientific or technological advancement uncertainty AND.
10 The solution, or method of Activities which seek to achieve arriving at the solution is not an advance in science or readily apparent to an technology appropriate skilled competent professional Page 41 10 September 2014 Optimising your R&D incentives 14. Science Test Is your company doing R&D? Development of new products, Development systems, Automation of of Proof of equipment, manual Concepts, processes processes which involved prototypes, significant etc technological uncertainty Are you involved in any of these Process Use of and were faced with improvements, universities/external , Increased experts that have unknowns/uncertainties that could specialised only be resolved through efficiency, cost knowledge experimental development? savings, improved throughput, etc Change of product material input effects on Scale-up Technical biocompatibility, experimental failures durability, trials on the consistency etc processing lines Page 42 10 September 2014 Optimising your R&D incentives Accounting test Accounting test expenditure incurred by the company wholly and exclusively in the carrying on by it of R&D.