Michael Noonan (Limerick City, Fine Gael)

The patent royalty exemption provided a tax exemption for income received by an individual or company from a qualifying patent, subject to an annual limit of €5 million. It also provided a tax exemption for distributions paid by companies from exempt patent income. The patent royalty exemption was abolished in the Finance Act 2011 on foot of a recommendation from the Commission on Taxation which concluded it had not resulted to any great extent in companies carrying out additional research and development activity and that it provided a windfall gain after a successful invention was developed rather than an incentive to undertake new research and development.

The total cost to the Exchequer of the patent income exemption was €72 million in 2009, of which approximately €16 million was associated with claims from companies. The original rationale for the scheme was to encourage research and development and stimulate inventive activity. However, the scheme was not particularly well targeted and it is clear that it was not only researchers and inventors who were the beneficiaries. Rather, the exemption was used as a tax-efficient means of rewarding employees and directors and had less of an impact in generating new research and development activity.

The research and development tax credit scheme is considered a more appropriate and targeted incentive and has been enhanced considerably in recent years to make it one of the most competitive of its type anywhere in the world. A tax credit of 25% of the incremental expenditure incurred by a company in an accounting period on research and development activities can be offset against a company's corporation tax liability. The scheme has been improved in most budgets and Finance Acts since its introduction in 2004. It offers a tax credit of 25% on incremental research and development expenditure, in addition to the normal 12.5% trading deduction. The base year has been permanently set at 2003, making it effectively volume-based for new entrants, and there is no ceiling to the level of eligible expenditure over the 2003 base year. Unused tax credits can be carried back for set-off against a company's prior-year corporation tax, CT, liabilities, thus generating a tax refund. Where there is insufficient current or prior-year CT liabilities, the company can claim unused tax credits in cash over three years. Expenditure includes direct and indirect costs in addition to capital expenditure on related plant and machinery. In addition, a proportion of capital expenditure on buildings used for research and development purposes now qualifies for a tax credit of 25% where, previously, expenditure on new or refurbished buildings would only qualify for the tax credit if used "wholly and exclusively" for research and development.

Given the 12.5% corporation tax rate, the availability of research and development credit relief, the capital allowances scheme for intangible assets and various other incentives such as the business expansion scheme, our tax regime has much to offer in making Ireland an attractive location for innovative enterprises to exploit their intellectual property and develop their business. The exemption for patent royalty income did not have the desired impact in terms of enhancing research and development and innovative business. As such, the removal of this relief will not have a significant adverse effect on our competitiveness in this regard. Ireland should be well able to maintain its position as an attractive location for companies to locate their research and development and intellectual property business activities and to provide high-quality employment in the process.

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