Budget 2023 - Gloal Investments and Innovations Incentives

Perspectives

Global investments and innovations incentives (Gi3)

Budget 2023

Key measures

A considerable focus of Budget 2023 has been on attempting to address the increasing cost of energy. Significant supports have been announced to support businesses in meeting spiralling energy costs. The Ukraine Emergency Response Scheme, is a €200 million scheme which is focused on supporting larger, exporting and manufacturing companies. The Temporary Business Energy Support Scheme (TBESS) is focused on Small and Medium Enterprises. This will be administered by Revenue and will cover 40% of the increase in electricity or gas bills, up to €10,000 per month with an annual cap.

In relation to innovation incentives, the budget announced amendments to the payable element of the R&D tax credit, to ensure it is considered a “qualifying refundable tax credit” under BEPS pillar two rules. A company will have an option to call for payment of their eligible R&D tax credit or to request for it to be offset against other tax liabilities, and existing caps on the payable element of the credit are being removed.

It was also announced that the Knowledge Development Box (KDB) will be extended for another 4 years. Changes to the effective rate of the KDB were announced in anticipation of STTR as part of OECD Pillar two. The new effective rate of the KDB is 10% resulting in a 2.5% tax saving for qualifying IP assets.

Who will be affected?

The new energy grants and incentives announced will help companies most at risk meet their rising energy costs.

Science, technology, engineering and innovative companies will appreciate the proactive protective measures to secure core incentives, R&D tax credits and the KDB, in light of global tax reforms.

When? What to do now?

TBESS is a self-assessed scheme administered by the Revenue Commissioners. Businesses will be required to register for the scheme and to make claims within the required time limits. The scheme will operate by comparing the average unit price for the relevant bill period in 2022 with the average unit price in the corresponding reference period in 2021. If the increase in average unit price is more than 50 per cent then the threshold would be passed and the business would be eligible for support under the scheme. Once eligibility criteria are met, the support will be calculated on the basis of 40 per cent of the amount of the increase in the bill amount. A monthly cap of €10,000 per trade will apply and an overall cap will apply on the total amount which a business can claim. Eligible companies for the €200 million Ukraine Emergency Response Schememust be in the manufacturing and/or internationally traded services sectors. Specific details of how to apply for the funding are yet to be announced.

Our view

The introduction of TBESS and the Ukraine Emergency Response Schemewill provide substantial support to help offset the increased cost of energy and will be welcomed by eligible companies. It would appear that a cohort of large companies may be unable to benefit from the large company scheme, due to the requirement for “manufacturing and/or exporting”, further clarification is required to this point.

There is a growing need to reduce energy consumption and for many companies to invest in more sustainable technologies. Further incentives and tax credits supporting actions to achieve reductions in energy demand and to transition away from carbon-based energy sources would be welcomed.

The focus of the budget was clearly on tackling rising energy costs, the budget failed to announce meaningful enhancements of innovation incentives. While the extension of the KDB is welcomed, pre-emptive measures to ensure compliance with BEPS Pillar Two requirements mean that its attractiveness and the scope for companies to benefit from the incentive have been further reduced. Similarly, the amendments to the treatment of the payable element of R&D tax credits will enable it to align with new international definitions. However, little was announced to encourage increased investment in R&D and generate highly skilled and valuable jobs.

A range of incentives are required to address the growing challenges faced by Ireland, be they macroeconomic, geopolitical or environmental. Ireland must continue to be seen as a competitive location for investment and as a leader in the areas of sustainability and innovation. Tax incentives and grants play an important role in encouraging such strategic investment. Developing and enhancing grant and tax incentive offerings must be prioritised.

Finance Bill 2022: Key Provisions

R&D Tax Credit

To comply with new international tax changes, the Finance Bill introduces two new sections to the legislation 766C and 766D. These change the timings and caps relating to payment of R&D tax credit claims.

  • There is an option to receive payment of eligible R&D tax credit or to request it to be offset against other tax liabilities. R&D tax credit will now be available in a new three year fixed payment schedule and existing caps on the payment element are removed.
  • The first instalment (payable in year 1) shall equal the greater of
    • €25,000 (or if lower, the amount of the R&D tax credit), or
    • 50% of the R&D tax credit
  • The second instalment will equal three-fifths of the remaining balance.
  • The third and final instalment will be the remaining balance.
  • Pre-trading expenditure incurred on qualifying R&D activities can be claimed as a payable R&D credit over a three-year period from the year the company commences to trade.

The Finance Bill confirms that the micro and small sized company scheme previously announced is being repealed as it failed to meet State aid criteria.

The removal of payment caps, the option of receiving the R&D tax credit as a
cash refund, including the accelerated monetisation options and enabling
startup companies to claim pretrading expenditure in the same manner are
positive developments.

Knowledge Development Box

  • The KDB is being extended to companies for a further four years to accounting periods beginning before 1 January 2027.
  • A new effective rate of 10% of qualifying profits will replace the previous 6.25% to comply with OECD Pillar Two objectives.
  • The KDB has failed to attract companies to avail of the scheme. Reducing the benefit available to companies is further reducing the scheme’s relevance to innovative IP generating companies.

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