Mr. Alan Carey:

Chairman and members of the committee, we welcome the opportunity to attend today to provide whatever assistance we can in relation to the topics covered in the committee's letter of invitation. I am joined by my colleague, Ms Jacqueline O’Callaghan, who is also a principal officer in the business, taxes, policy and legislation division of the Revenue Commissioners. I understand from the invitation letter that the committee wishes to discuss matters relating to the following tax expenditures: research and development tax credits, knowledge development box, KDB, and film relief. I am sure the committee will appreciate Revenue’s role in relation to the review and evaluation of tax policy measures. As the tax administration in the State, Revenue collects taxes and duties. Through this, Revenue has access to, and is able to provide, statistical information and analysis of tax returns and receipts as well as insights from our compliance activities. To assist the development and evaluation of tax policy, Revenue publishes information in relation to tax statistics, tax receipts and costings on a dedicated section of the Revenue website. While it is Revenue’s role to provide facts and advice to inform the policymaking process, it would not be appropriate for us to make any comment on policy matters.

I will give a brief overview of the three tax reliefs under consideration by the committee, including some high-level statistics in relation to them. We will be happy to address any questions the committee might have in relation to these topics. While we will provide whatever assistance we can, the committee will appreciate that Revenue is constrained by law, and specifically by section 851A of the Taxes Consolidation Act 1997, from discussing the tax affairs of any taxpayer on confidentiality grounds. This includes providing any information that might lead to the identification of any taxpayer.

The research and development tax credit allows a company to claim a 25% tax credit in respect of expenditure incurred on qualifying research and development activities. The credit is available in respect of expenses incurred in the carrying on of research and development, as well as on amounts spent on plant and machinery used and on buildings used to house research and development. The research and development credit is available for offset against a company’s corporation tax liability in both the current and preceding accounting periods. Where there is an excess research and development credit remaining, a company may claim the excess as a payable credit, with 33% of the payable credit available in the first year, and the balance payable over the next two years. There is a limit on the amount of the payable credit a company can claim, with the limit being determined by reference to the amount of corporation tax paid by the company in the previous ten years or by the amount of payroll taxes paid by the company.

The latest year for which claims and cost figures for the research and development tax credit are available is 2020, when the total cost of the credit was €658 million in respect of 1,616 claims. In that year, small and medium-sized enterprises accounted for approximately 88%, or 1,420, of the total research and development tax credit claims. Larger companies dealt with by Revenue’s large corporates division, LCD, accounted for 73% of the total value of research and development claims made in 2020. Companies which claimed these tax credits in 2020 paid €5.6 billion of net corporation tax receipts in that year - that is, net of the research and development credit.

Table 1 sets out the total cost of the research and development credit for each of the years from 2004 to 2020 and the total number of claimant companies in each year. Table 2 provides a breakdown of the cost and number of research and development tax credit claims between large companies dealt with by LCD and small and medium enterprises which are not dealt with by LCD. Table 3 provides an overview of the total value of expenditure, in respect of which the research and development credit is claimed, for each of the years from 2012 to 2020, broken down between small and medium enterprises and large enterprises. In 2020, of the €3.1 billion total value of expenditure on research and development, €2.6 billion was by foreign-owned multinational companies. Research and development credit expenditure by Irish-owned multinationals was €215 million and non-multinationals accounted for the remaining €293 million.

The knowledge development box, KDB, was introduced in Finance Act 2015 and applies for accounting periods commencing between 1 January 2016 and 31 December 2022.

The KDB provides for relief from corporation tax on income arising from qualifying assets such as computer programmes and inventions protected by a qualifying patent or, in respect of smaller companies, other intellectual property that is similar to an invention which could be patented. A company qualifying for the KDB may claim a deduction equal to 50% of its qualifying profits. This means that the company’s qualifying profits may be taxed at an effective rate of 6.25%. A company has 24 months to submit a claim for the KDB. Table 4 provides a breakdown of the overall cost of the KDB for each of the years 2016 to 2020. Statistics for 2020 are provisional due to the 24-month timeline for making a claim.

Regarding the film tax credit, a tax relief relating to the film industry was first introduced by section 35 of the Finance Act 1987. Prior to 2015 the scheme operated by giving tax relief to individuals investing in the film industry. Since 2015 the scheme provides direct support to film producer companies in the form of a corporation tax credit. Producer companies that meet certain requirements may claim a credit at a rate of 32% in respect of the production costs of a qualifying film. The credit is available on the lower of: eligible expenditure, 80% of total qualifying film production costs or €70 million. The maximum value of relief that may be claimed is €22.4 million. A total of 186 producer companies have received €600 million in respect of film tax credits relating to the making of 592 films. Table 5 provides a breakdown of the value of claims and the number of projects for each of the years 2015 to 2021.

When the corporation tax credit scheme was first introduced, the Revenue Commissioners administered both the certification and the payment of the credit. Following amendments in Finance Act 2018, the producer company must apply to the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media for a cultural certificate in advance of commencing the film. A cultural certificate is a confirmation that the film is a qualifying film for the purposes of the film tax credit. The credit was moved onto a self-assessment footing from March 2019 to bring applications under section 481 within the normal penalty and prosecution regime where an incorrect claim is made. Producer companies are required to calculate the value of credit due and make their claims through their corporation tax returns.

In summary, the role of the Revenue Commissioners in the review of tax expenditures is primarily to support the process through the provision of statistical information and insights gathered as part of our administration of taxes.

We will answer any questions from members of the committee on these issues, subject to the constraints I noted in my opening comments.