Thursday, 22 March 2012
Finance Bill 2012 (Certified Money Bill): Committee and Remaining Stages
Michael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
I will deal first with the issue as it stands in the recommendation and the section and will then deal with the general issue of tax expenditure as raised by Senators Barrett and Reilly.
This section is designed to allow companies to attract and retain key people in order to facilitate the expansion of research and development activities in the State, thereby creating more jobs. Under the provisions an employee, the vast bulk of whose duties involves research and development, can avail of a reduction in his or her income tax liability as a result of the surrender by his or her employer company of the research and development credit to which that company was entitled. The relief is strictly targeted at individuals carrying out research and development work with the aim of leveraging greater activity and employment in the economy as a result. The recommendation seems to suggest that such an initiative is not worthwhile at this time, a view I cannot support. Therefore, I do not accept it. The research and development scheme is reviewed every year and use of this new measure in particular will be monitored to see how it is being used. If any abuses are found the measure will be removed.
There is no cost to the Exchequer from this provision. At present companies get a tax credit for expenditure in research and development but they can only use it to reduce the tax on the company and cannot distribute it to the individual workers. There is no increased imposition on the taxpayer with this but it allows that a company with a tax credit, let us say a small company with a tax credit of €100,000, can, instead of attributing the credit to the company accounts, use it to incentivise key workers, not only to reward them but to hold on to them. People who are good at research and development are very flexible and fluid and can move very easily. Another point to note is that at present every tax break is subject to the overall condition that people pay up to 30% of their income in tax in any case, when one adds in the universal social charge and PRSI. The days of high-income individuals paying no tax are over.
I refer to the general issue. The attempt or campaign to attract foreign direct investment to countries is very competitive. The Government must always watch what is happening in other countries that compete with us for the same foreign direct investment we have been successful in attracting. There was no research and development incentive available in Ireland until the Finance Act 2004 and in consequence the IDA felt at a loss. There is some circumstantial evidence about the effectiveness of research and development. In 2003, expenditures from research and development investment were at €1.076 billion. In spite of the economic downturn that figure had risen to €1.9 billion in 2009. There is some evidence that the introduction of the research and development tax break increased activity. Last year the IDA informed me that some €700 million in investment won for Ireland in 2011 was research and development related. Again, there is evidence of a direct relationship between the availability of this tax break and investment from abroad.
The Commission on Taxation did not recommend the abolition of this tax expenditure but it did recommend abolition of other ones. The Government is proceeding to reduce progressively the number of tax expenditures on foot of the commission's report. In general terms I agree with Senator Barrett's arguments that every tax expenditure should be scrutinised and only those proven to be effective should be allowed to remain as part of the tax code. Although this particular one seems to be working effectively it will be kept under review. At present it is reviewed every two years.