We need vision to incentivise Irish R&D

Improved tax breaks for research & development and intellectual property are vital for Irish business, argues JIM RYAN

THE ECONOMIC stresses facing the Irish SME sector are well documented. Irish indigenous business is fighting its corner furiously against the backdrop of the credit crisis, a strong euro versus weak sterling, and declining consumer confidence globally.

While Government needs to pay urgent attention to the crisis in the SME sector, we must not lose focus on the medium to long-term development of the Irish economy. In its December report entitled Building Ireland's Smart Economy: A Framework for Sustainable Economic Renewal, the Government signalled its intention for Ireland to become a leading knowledge economy. If we are serious about this, we must act now.

One of the most effective ways to get there is by incentivising research development (RD), and making sure that Ireland’s tax regime to encourage RD stands out from the crowd on the international stage.

We have gone some way towards achieving this with the introduction of the RD credit in the 2004 Finance Act, and modifications in subsequent Finance Acts. The current provision allows for a tax credit for incremental expenditure on RD incurred by trading companies.

However, it is still a case of “a lot done, more to do” because while RD expenditure has increased significantly in Ireland in recent years, the total amount remains low by international standards. Many of our competitor countries have similar RD credit systems in place, and we need to adopt a flexible, fast-mover approach to the issue, constantly reviewing our model and making the required changes to give Ireland a competitive edge.

One possible improvement would be to allow companies greater flexibility on claiming the relief including an offset against employment costs; this would be a welcome development for businesses and would give Ireland a competitive advantage in the coming years.

In formulating tax policies to deal with the current situation, it is important that we do not lose sight of our success in attracting large-scale international industries such as information technology, pharmaceuticals and financial services.

Innovations to the RD regime in the most recent Budget brought about some very welcome changes, and created a much improved volume-based system. However, there is an onus on Government to ensure that the credit is having the desired effect and, like all tax incentives, it must be closely monitored to ensure that it is delivering on its objectives. We must ensure that the change in the RD tax credit is leading to the generation of high-value employment and development of leading-edge skills for our economy.

Developing Ireland as a leading knowledge economy benefits all businesses in this country – not just the large foreign multinationals. But becoming a world-class centre for intellectual property excellence and management will only come about if we prioritise the incentivising of RD activity. Irish businesses of all sizes have been competing effectively in world markets but they can only maintain their edge by continuing to invest in leading-edge technology and processes.

And that is the other essential component in the pursuit of the knowledge economy goal; a progressive Intellectual Properties (IP) policy. As Irish-based companies look to move up the value chain, it is clear that the related expertise, intellectual property, technology and knowledge economy brands should also be owned by Irish-based companies with Irish-based staff controlling the design and implementation of IP-related strategies.

The development of our IP tax regime has been highlighted as a priority for the Government. Ireland will need to work hard to become an IP location of choice. We need to encourage the active management of IP by Irish businesses through an increasingly supportive tax regime, with a broad definition that will encompass all areas of IP currently available.

There is a welcome commitment from Government to reduce the administrative burden of regulation on business by 25 per cent by 2012 and we look forward to positive changes being made in relation to tax administration. In a small business the entrepreneur’s time is at a premium.

The time spent on administration detracts from the time that could be spent on building contacts, customers and the business. In particular, those who are operating on their own can feel overwhelmed by the burden of administration.

A pro-enterprise tax system should support business with minimal interference and red tape. If we combine this with progressive policies in the pursuit of the knowledge economy, we will be laying a solid foundation for a resurgence in the SME sector.

Jim Ryan is president of the Irish Taxation Institute