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Deloitte submission on the Research & Development Tax Credit and the Knowledge Development Box

On 14 April 2022 the Department of Finance launched its public consultation seeking stakeholder views on
The existing Research and Development (“R&D”) and Knowledge Development Box (“KDB”) regimes. The purpose of this public consultation was to consider the current challenges facing firms who are active in the R&D and IP space, as well as the implications of recent domestic and international tax reforms for these two reliefs.

Submissions closed on 30 May and Deloitte were pleased to provide our insights to the selected Department questions raised in the consultation.

See the summary of our discussions on key focus areas below and read our full submission here.

Summary of observations and recommendations

As an overarching comment, Ireland’s current R&D credit and KDB regimes are complex and have experienced significant change over the years. This has resulted in a regime which does not lend itself either to taxpayer certainty or user-friendly compliance obligations.
Accordingly, we made the following key observations and recommendations in our response to the Department of Finance:

  • Consideration should be given to expanding the list of qualifying fields beyond the existing science and technology categories contained in law and guidance. The treatment of cloud computing costs for R&D Tax Credit purposes and whether such costs may be treated as qualifying is not addressed in guidance; accordingly, the Revenue district in question determines whether such costs may form part of an R&D Tax Credit claim. The UK Government, by comparison, recently confirmed in its Spring Statement that from April 2023, all cloud computing costs associated with R&D, including storage, will qualify for relief. To support the growing volume of R&D in computer science and computer-based modelling that is underpinned by new and novel application of mathematical methods, the UK is adopting an approach whereby the definition of R&D for tax reliefs will be expanded by clarifying that the application of pure mathematics is a qualifying cost. This puts the Irish R&D Tax Credit regime at a competitive disadvantage compared to the UK regime, our nearest competitor for RDI investment.

  • Consideration should be given to a broadening of the direct R&D costs that qualify for the credit to include outsourced services which are not R&D when considered from the perspective of the company providing those services. e.g. testing and analysis of prototypes/materials/samples and where materials and equipment are modified or transformed by external suppliers so that the claimant company can use these items in their R&D. Indeed, the continued narrowing of the allowable expenditure within claims creates significant difficulty for claimants. The removal for example, of rent as an allowable expense in many claims has signalled a reduction in the value of R&D Tax Credits for many claimants. This is happening at a time when the UK for example is moving to a higher rate of tax relief and clarifying inclusion of cloud hosting costs etc.
  • We believe the outsourcing restrictions in the R&D Tax Credit regime should be removed. Consideration should be given to removing or significantly increasing the €100,000 or 15% limit on qualifying outsourced expenditure to Third Level Institutions and the restrictions on outsourcing to related parties. This would be consistent with other jurisdictions.
  • Enhanced credit provisions for “Green” projects - Ireland currently faces renewed challenges linked to conflict in Ukraine, a heightened focus on our reliance on fossil fuels and climate change objectives. In 2021, Ireland undertook a welcomed temporary change in its R&D tax relief provision to allow for the early payment of R&D Tax Credits under s766 TCA97 in response to the Covid pandemic. This should be continued and consideration given to the early repayment of the R&D credit for certain “energy saving” and “green energy” projects earlier than the set 3-year timeframe provided for in law. Such activities are essential from a climate change perspective globally and we believe that if our offerings and incentives were improved further to specifically encourage and accelerate the level of R&D in these areas, it would attract more companies to Ireland and lead to expansion of existing R&D centres. A similar “early repayment” approach is suggested for SMEs.
  • An immediate, easily implemented and significant value add for Irelands FDI competitiveness would be to increase the R&D Tax Credit to 30% for all claimants (or at least for SMEs). This would reduce the cost of conducting high value activities, managed and conducted by a skilled workforce on the island of Ireland. This in turn improves competitiveness and secures our already established R&D performing multinationals. It also has the added benefit of closing the gap on Irelands R&D specific competitiveness when compared to other European and international geographies where more generous tax benefits exist for undertaking R&D activities.
  • In addition, consideration should be given to amending the wording of section 766(1)(a) TCA 1997 to “wholly and exclusively for the purposes of R&D activities”, rather than “wholly and exclusively in the carrying on by it of R&D activities”. This amendment would provide greater clarity and certainty to claimants of the relief with respect to qualifying costs e.g. travel costs etc.
  • The challenge of the international tax agenda was recognised by the IMF recently in its Staff Concluding Statement of the 2022 Article IV Mission on Ireland. It noted that its “Staff welcomes the planned medium-term fiscal strategy given that public debt is above 100 percent of GNI* and in view of the remaining uncertainties about changes in international corporate income tax (CIT) rules.” Therefore, a review of the mechanism by which the R&D Tax Credit is refundable, in order to ensure that it meets the conditions to be considered to be a “refundable income tax credit” under the GloBE rules. We would suggest that the domestic law be amended to ensure that the R&D credit can be regarded as suitably “refundable” and set against other non-covered taxes of the taxpayer concerned at the discretion of the taxpayer.
  • From the SME’s point of view, we would recommend a reduction to the auditable period for R&D claims down from 5 years after the end of the accounting period would particularly assist SME’s as they are more prone to staff rotation. In addition, reducing the number of cash instalments from three to one (on an optional and elective basis) would assist SMEs from a cash-flow perspective and reduce the financial risk of investing in R&D. The difficulty regarding certainty of application for SMEs could be reduced by Revenue’s pre-approval on projects/claims by SMEs, which exist in other countries (Germany, South Africa), to provide certainty on science test.

From a KDB perspective, although devising an OECD-compliant KDB was a key requirement, there are a number of areas that should be considered to improve Ireland’s KDB offering which would include bringing about a group election mechanism in addition to its being extended to capital gains arising on the disposal of qualifying assets. The interaction of a claim for relief under the KDB and a claim for a cash refund of R&D Tax Credits is another area where the KDB should be enhanced.

The above are some of the main recommendations made in this report and we look forward to engaging with the Department of Finance of any of these measures.

Next steps

The Department of Finance and Revenue may also invite key stakeholders to meet with them, including representative bodies, tax professionals and other interested groups or individuals. Tax policy issues from this public consultation will form part of the Minister for Finance’s considerations in relation to the applicable legislation and all input will be considered in the context of this year’s Budget and Finance Bill.
 

Deloitte submission on the Research & Development Tax Credit and the Knowledge Development Box
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