Michael Noonan (Limerick City, Fine Gael)

It is clear from the fact that IDA Ireland secured 79 new investments from existing clients in 2010 - some 37 of which, or almost 50%, were in the area of research and development - that the tax credit scheme for research and development has proved very effective since it was introduced in 2004. The value of the investment in Ireland arising from these new research and development projects is approximately €500 million. It also involves a considerable number of jobs.

When the scheme was originally introduced, it was intended that the base year would be the year three years before the year of claim. It was planned that 2003 would be taken as the base year for the first three years of the scheme, until 2006. There have been substantial improvements in the position since then. In the Finance Act 2007, the use of 2003 as the base year was extended for a further three years of claim, up to and including 2009. In the Finance Act 2008, the use of 2003 as the base year was extended for a further four years of claim, up to and including 2013. In addition, the rolling base year rule was changed so that, in relation to a year of claim after 2013, the base year was fixed as the year corresponding to the year of claim, but ending ten years before the year of claim. It was proposed that the base year for 2014, for example, would be 2004. The Finance (No. 2) Act 2008 fixed 2003 as the base year for all future accounting periods.

An incremental approach, as opposed to a volume approach, was deliberately chosen to encourage companies to increase their level of research and development. Companies are therefore incentivised to carry out additional research and development activities, over and above their level of such activity in the base year. Where research and development remains static, or is reduced when compared to the base year, no tax credit is due. In the case of companies that commenced research and development activities after the end of 2003, the threshold is zero. As the threshold amount is the actual amount of expenditure incurred in 2003 rather than an indexed amount, the effect of the retention of 2003 as a base year has moved the credit closer to a volume-based amount.

The Deputy is right to acknowledge the tight fiscal position of the Government. When one does not have big sums of money to throw at problems, one has to start thinking outside the box and to try to get the maximum effect from a minimum amount of expenditure. Government and Opposition Deputies need to think smart. I will give an example of what I am talking about. I am not saying this in a contentious way. It was announced in the 2010 budget that employers' PRSI would be charged on share option schemes. The Deputy is familiar with how they work. They are given to an employee and perhaps vested for five years later. When this measure was announced, it seemed that it would be retrospective. It was provided for in the Finance Bill in January of this year.

When I came into office, I learned that the proposal had been the subject of a great deal of lobbying on the part of investors, who thought it would make life difficult. An adverse view of it was taken, particularly in North American boardrooms. They thought it was a huge imposition. When I consulted the Revenue Commissioners, they found that as drafted it could not be made retrospective - it could only apply from 1 January 2011 - and that the yield to the Exchequer would be less than €2 million. As part of my jobs initiative announcement, I said I intended to drop it. It has already been confirmed that as a result, an investment here which had been held up is to go ahead. It involves a €50 million construction project and, when the construction has been completed, the creation of 100 research and development jobs. It will deliver more tax than the Finance Bill measure, which was included in good faith, would have done in 20 years. I am not making a political point; I am just mentioning it as an example of what can happen when one tries to tweak these things.

In reply directly to Deputy O'Dea, there are other changes I want make on research and development but we had not time to consider them fully for this Bill. We will consider them in advance of the 2012 budget.

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