Several multinational firms have been found to be aggressively and improperly claiming tax credits for research and development to lower their corporation tax bills.
A Government scheme gives firms up to 25 per cent of their expenditure on R&D in the form of cash or a credit against their corporation tax.
While industry sources say the measure has been highly successful in supporting thousands of jobs, audits by the Revenue Commissioners found some firms were exaggerating the amounts they were spending on research.
Firms were forced to repay the exchequer a record €21 million in back-tax following more than 200 audits in 2013.
Provisional figures for 2014 indicate that a further €14 million has been repaid, though these figures are likely to rise once ongoing audits have been completed.
Official figures show the credit is used predominantly by multinational firms and other large employers in the tech and manufacturing sectors. It can be used for a range of expenses linked to technology or science.
More than 1,500 companies availed of the credit last year, up from just 75 in 2004.
Over that same period, the cost to the exchequer – in credits and foregone taxes – has risen from just over €70 million to more than €400 million last year.
While the credit has been identified internally by Revenue as a "significant risk", a recent review by the Department of Finance found it played a vital role in supporting thousands of jobs and almost €2 billion of research activity. Industry sources say it helps support as many as 19,000 jobs.
It also found the tax credit matched offerings from rival countries seeking to attract foreign direct investment, and was among the most favourable in respect of certain elements.
It can be claimed on expenditure linked to buildings or equipment used for research only, as well as the wages of people employed exclusively on research activity.
Revenue has hired scientific and technical experts to examine the activities of firms to determine if they are involved in genuine R&D, known internally as the “science test”.
But records indicate most non-compliance relates to research costs being exaggerated or improperly attributed.
Aisling Donohoe, a tax specialist with mgpartners, said audit settlements typically involved the Revenue challenging "aggressive interpretations of grey areas in the rules", along with insufficient controls for allocating costs to research activity.
“Research and development is one component of product development and determining what falls within the R&D rules will generally require a judgement call which may be challenged by Revenue,” she added.
In a new development, meanwhile, Revenue has launched six audits of multinationals’ transfer pricing policies, a key tax arrangement which allows large firms to reduce their tax bills.
Large firms with Irish subsidiaries have been using the practice to significantly lower their tax bills by shifting intellectual property rights to offshore affiliates.
Revenue has been under pressure from European authorities to show whether it has been subjecting firms to sufficient scrutiny over the practice, especially since controversy erupted surrounding details of Apple’s tax affairs.
Apple is one of a number of US multinationals with a presence in Ireland which have used transfer pricing to shift intellectual property rights from the US to offshore affiliates, as well as direct income associated with that intellectual property.
The European Commission, which is investigating the handling of the Apple case, has said it believes Irish authorities conferred a tax advantage to the company through tax agreements. Some of these are understood to relate to transfer pricing.
In addition, Revenue’s new transfer pricing audit team has taken part in four other audits where “arms’s length” principles were identified as red-flag issues.
This centres on whether large firms have been charging open market prices for transactions between subsidiaries or related companies.