Jim Daly (Cork South West, Fine Gael)
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I welcome the opportunity to raise this issue in the Dáil. It is a most important issue which relates to an industry in which we are all placing enormous hope and trust with the aim of reviving our country from the current crisis through an emphasis on exports and SMEs. I wish to discuss patent income tax relief, which may be better known as patent royalties. This scheme was first introduced in the 1960s and was amended in the Finance Act 2006 with the introduction of a number of anti-avoidance measures to prevent certain abuses of the scheme of relief for distributions made out of income from the scheme. The abolishment of this scheme by the previous Administration has destroyed one of the few incentives available for ordinary businesses to conduct research and development and to develop products to take to the market. While some incentives remain for those who want to get involved in research and development, there is no compulsion to bring products to the market. The abolishment of the system in last year's Finance Act has ensured that people can continue in research and development but do not have to bring their products to the market to avail of the tax breaks.

Patent royalty was the only incentive for natural-born entrepreneurs and inventors to put their heads together and invest substantial revenue in particular projects, doing their upmost to get these products to the market. While changes like the €5 million cap introduced back in 2007 are welcome, the complete abolishment of the scheme was a major blow to the SME sector. A reintroduction of the scheme, perhaps with further limitations - for example, with a reduction of the cap to €100,000 or €150,000 to ensure it was targeted at SMEs and could not be taken advantage of by larger businesses - would be a major boost to the sector and would also be beneficial to the Exchequer. There is no doubt that the original scheme created jobs, and most of the royalties were reinvested in further research and development projects.

At a time when this country is craving an increase in exports - in fact, we are almost totally reliant on the sector to revive us from the current crisis - we need to support the extraordinary individuals who manage to invent new products and sell them in major multiples all over Europe and the world. When this scheme was abolished, Ireland was the fourth lowest filer of patents in the entire eurozone, and I doubt there has been any improvement since then.

This is not one of the typical tax reliefs that anyone can avail of. The patented product must be a success - it must be manufactured and sold - before any tax relief is distributed. Each of these processes will make a major contribution to the Exchequer by way of VAT, PAYE and corporation tax.

At this time, there is absolutely no incentive to encourage budding entrepreneurs to invest in such products and make them a success. In fact, patent owners will now be hit with two tax levies: corporation tax, when the holding company receives the royalty payment, and full income tax and levies on any of the payment that gets back to shareholders directly. This is a radical shift from what these business people are used to, and I am aware of numerous companies that are not investing in the development of such ideas at present as they cannot afford to do so. I would hate to see Irish companies being forced to outsource the manufacturing of Irish ideas to other countries with cheaper labour markets. This would not happen under the patent royalty scheme, as a product must be developed within the country for the developer to avail of the tax breaks. I ask the Minister to reconsider this scheme in the run-up to next year's Finance Bill, with a view to reinstating it on a much smaller scale in order exclusively to support small businesses by offering them incentives to develop new projects.

Michael Noonan (Limerick City, Fine Gael)
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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.

Jim Daly (Cork South West, Fine Gael)
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I thank the Minister for his reply. The point I am arguing is that we threw out the baby with the bathwater when we abolished this tax relief. I accept there were abuses of the scheme and that some companies were gaining to a huge extent. Nevertheless, the decision to eliminate it has done great damage to the smaller companies engaged in research and development which were reliant on it. The abolition of the scheme has also reduced the incentive to bring new products to market. I acknowledge it is complex legislation, but we owe it to the small and medium-sized business sector, on which we are placing a great emphasis in our efforts to mend the economy, to re-evaluate our approach. A one-cap-fits-all position is not the right approach to take. I ask the Minister to consider reintroducing the scheme in a targeted manner and with much reduced cap. The previous cap of €5 million was excessive - reducing it to €100,000 will help to restore our edge in terms of research and development by encouraging entrepreneurship among small and medium-sized businesses. The abolition of the relief scheme threatens to choke all endeavour in that regard.

Michael Noonan (Limerick City, Fine Gael)
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The scheme was not abolished in an arbitrary fashion or by political or administrative decision but only after a full review by the Commission on Taxation. The commission's view was that while the relief provided additional windfall taxes to persons who registered patents, it did not act as an incentive for additional research and development, as was its objective in the first instance. Current provisions regarding tax relief for research and development cover not only the original incentive provided by patent royalty exemption but also have a much broader impact and are recognised internationally as a significant incentive for research and development.

Nevertheless, while not holding out any hope of reversing what was done last year, I will re-examine the scheme along the lines of Deputy Jim Daly's proposal to see whether it could be focused on companies which are inventive but have small turnovers. Any reinstatement of the relief would apply only to a small tranche of income. I am not sure whether it will be possible to take this approach given that such incentives generally must apply to everybody. However, it may be possible to confine it by way of cap. The previous threshold of €5 million was very high.