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OPINION: Ireland Needs Smart Policies to Keep Innovating

OPINION: Ireland Needs Smart Policies to Keep Innovating
National Story

Ireland has recently been appearing in the world press in relation to stories about its tax system, with some commentators equating Ireland to a tax haven. The commentary is far off the mark, and the recent Irish budget statement by Finance Minister Michael Noonan will hopefully bring much of the controversy to an end and allow people to focus on the main reasons why many U.S. companies decide to open operations in Ireland.

In the Forbes ranking of “best countries for business,” Ireland was the only nation that ranked among the top 15 percent of countries in every one of the 11 metrics Forbes examined. Whether it is flexibility of our workforce, availability of talent, the range of investment incentives available, or the business environment and legislation which underpins it, Ireland tends to come out on top when compared to its peers.

Tax policy in Ireland has been geared towards attracting in companies from abroad. The cornerstone of this policy is the 12.5 percent corporate tax rate. In his speech last week the Minister reiterated the government’s commitment to maintaining this. “The 12.5 percent tax rate never has been and never will be up for discussion. The 12.5 percent tax rate is settled policy. It will not change.” I think it is fair to say that his statement is unequivocal.

With the likely changes being driven by the OECD and the G20 countries who are trying to put an end to harmful tax practices, the core corporate rate is going to become key and Ireland has one of the lowest rates in the EU. Supporting the rate is an attractive R&D tax incentive scheme which gives an additional 25 percent credit on top of the 12.5 percent (taken as a deduction for R&D spending), meaning that 37.5 percent of all R&D is effectively paid for by the State. The ability to take advantage of the R&D tax credit in advance of actually making profits by setting the credit off against payroll taxes makes it particularly attractive for startup technology companies.

The country also has an intellectual property regime which enables businesses to set out the capital cost of the IP held in that business against profits arising from the exploitation of that IP, as long as the company is deemed to be trading in respect of its IP. Generally this is achievable but it requires “feet on the ground,” with those employees having the requisite skills and experience to actively manage and exploit the IP, generally speaking, through licensing it to other group companies within the wider organization. Many companies chose not to use this option but instead implemented the “double Irish” strategy, whereby profits were moved from the Irish tax regime into a lower tax regime, such as Bermuda, using perfectly legal (but now frowned upon) tax strategies to significantly reduce the global tax rate of those businesses.

Significant pressure was brought to bear on Ireland as a result of the use of the double Irish by many large U.S. multinational corporations. Ireland responded and introduced new legislation and a new incentive, a “knowledge box,” which will be similar in nature to other “patent box” incentives available in our competitor EU jurisdictions. It is expected that a special low rate of tax will arise from exploitation of the knowledge box. The Minister also announced the ending of the double Irish tax strategy. It will end for those who have implemented it already by the end of 2020. The ability to set up such a structure will cease at the end of 2014, so I would expect many businesses to take advantage of this strategy over the coming weeks.

Tax policies and other government incentives cannot alone grow and develop a vibrant culture of invention and innovation. Lack of such policies and incentives, though, can ensure that an already steep hill is made all the steeper with finance and tax costs, meaning innovation is extremely challenging. A well-educated workforce, a long established culture of discovery and innovation, and a pro-business environment are more important.

The connection between Ireland and the U.S. goes beyond traditional family connections which have arisen through many decades of Irish people immigrating to the U.S. Technological and other innovations have gone on for many decades also, whether it is the first non-stop flight across the Atlantic to Clifden in County Galway or Marconi’s first transatlantic broadcast by radio wave, there is a rich culture of cooperation in innovation between our two countries. Long may it continue.

[Disclosure: Baker Tilly Ryan Glennon is a sponsor of Xconomy’s Innovation in Ireland special report. This op-ed post was selected by Xconomy’s editors because of its relevance to the topic and was not part of any sponsorship agreement.]

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