Pearse Doherty (Donegal, Sinn Fein)
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216. To ask the Minister for Finance the estimated first-and full-year cost for making research and development payable credits, under the R&D tax credit, payable in one instalment within 12 months for small and micro-companies. [34392/23]

Michael McGrath (Cork South Central, Fianna Fail)
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It is assumed that the Deputy is referring to accelerating the second and third payable credit associated with the research and development tax credit for small and micro-companies.

The Deputy may be aware of changes included in the Finance Act 2022 which made the first €25,000 of a claim on R&D expenditure payable in full, to provide a cash-flow benefit for smaller R&D projects and encourage more companies to engage with the regime.

I am advised by Revenue that, while the suggested measure would not entail any sustained overall increase to the cost of the credit, the estimated additional cash flow cost associated with making the research and development payable credits payable in one instalment within 12 months for small and micro-companies is in the region of €45 million in the first full year.

This estimate is based on information included in tax returns for the year 2021, the latest year for which data is available, and does not take account of any potential behavioural change. I would also note that introducing a targeted element to the credit would have State aid implications.

Pearse Doherty (Donegal, Sinn Fein)
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217. To ask the Minister for Finance to clarify the impact of Pillar Two of the OECD Agreement on the operation of the research and development tax credit regime; and in particular, the estimated increase that would be required in the percentage of qualifying expenditure under the tax credit that would be required to neutralise the impact of Pillar Two on its operation, together with the cost/savings of neutralising this impact with respect to SMEs only. [34397/23]

Michael McGrath (Cork South Central, Fianna Fail)
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The Research and Development (R&D) Tax Credit is an important feature of the Irish Corporation Tax (CT) system. The primary policy objective is to increase business R&D in Ireland, as R&D can contribute to higher innovation and productivity. More broadly, the tax credit forms part of Ireland’s corporation tax offering aimed at attracting FDI and building an innovation-driven domestic enterprise sector. The credit enables Ireland to remain competitive in attracting quality employment and investment in R&D.

The Pillar Two minimum effective tax rate will have an impact on the net benefit to large MNCs of the R&D tax credit. A corporate group will be within scope of Pillar Two rules where it has consolidated group revenue of over €750 million in at least two of the previous four years.

Pillar Two will result in a net reduction in the value of the tax credit for claimant companies that are in scope of the 15% minimum tax. Under Pillar Two rules, a tax credit that is not a “Qualifying Refundable Tax Credit” (QRTC) is deemed to reduce the tax paid by the company, thereby reducing the effective tax rate and potentially resulting an increase in Pillar Two top-up-tax due. A QRTC is treated as income, rather than a reduction in tax paid. This preserves the majority of the value of the credit, however the treatment of the credit value as income means that it becomes subject to the minimum tax calculations. Changes were made to the operation of the R&D tax credit in Finance Act 2022 in order to bring it in line with the definition of a QRTC. Hypothetically, to deliver the same net benefit as a 25% tax credit currently, a tax credit of 29.41% would be required where a Pillar Two top-up tax applies.

Revenue data does not separately identify R&D Credit claimants as being either SME or non-SME companies. However, a reasonable approximation can be made using the categorisation of companies in published Revenue data. The latest publication contains information in relation to the 2021 tax year and is available at:revenue.ie/en/corporate/documents/research/ct-analysis-2023.pdf.

This includes information concerning the number of Revenue Large Cases Division (LCD) companies and non-LCD companies who have claimed the credit. While companies that are outside the remit of LCD are not necessarily SMEs, the majority would be, therefore this data provides a proxy to estimate claims by SME and non-SME companies.

In view of the group turnover threshold of €750 million, it is expected that most SMEs will not be in scope of Pillar Two rules.

Pearse Doherty (Donegal, Sinn Fein)
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218. To ask the Minister for Finance the estimated first-and full-year cost of increasing the percentage of qualifying expenditure under the research and development tax credit from 25% to 30% for SMEs.; and if he will make a statement on the matter. [34403/23]

Michael McGrath (Cork South Central, Fianna Fail)
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It is not possible to accurately project the cost of increasing the portion of expenses allowed for deduction under the Research and Development tax credit from 25% to 30% for SME companies as the R&D credit is based on qualifying R&D expenditure and information in respect of future qualifying expenditure by SMEs is not available.

However, I am advised by Revenue that, based on claims in respect of the research and development tax credit included in 2021 tax returns, the estimated tax cost of increasing the rate to 30% for SMEs could be in the region of €40 million in a full year. This cost assumes no behavioural change. I would also note that introducing a targeted element to the credit would have State aid implications.