Report of the Innovation Taskforce

An Saoi: I read the Report of the Innovation Taskforce and wept. The Government’s big idea is per Brian Cowan’s piece in Saturday’s Irish Times “We are open for business as a global innovation hub”. I would more accurately describe it as “We are (still) open for business as a global hub of tax planning & scamming”.

There are some reasonable proposals in the document. But when you cut through the waffle, many of the proposals are designed to move Ireland from a low corporate tax environment to a no corporate tax environment, in the hope we get a few jobs as our reward. In Germany or any other sane country a task force with such a remit would be stuffed full of engineers and scientists. Not so in Ireland.

I am a sucker for word searches. It gives you a feel for the document. In this report, the word “tax” is mentioned 127 times, the word “food” eight times and the words “manufacture” or “manufacturing” just 24 times. When “tax” pops up you will always find those three letters “FDI” are not far behind and sure enough they are there 35 times.

Therefore this is a report which pays lip service to Irish SMEs, barely mentions the Public Sector, and almost all of the serious proposals are in relation to tax scamming for multi-nationals. But there are four direct representatives of multi-nationals on the taskforce.

The nub of the Report is contained in Appendix Six, which sets out six tax proposals, which have little to do with the development of innovation in Ireland. I ask for your forgiveness in advance because I am now going to talk tax.

The first proposal relates to IP (intellectual property) and is about “the competitiveness of our tax regime for internationally mobile IP rich businesses.” This is basically a proposal to weaken Section 291A further. This enables multi-nationals to take profits from high tax jurisdictions and move them to a low tax location such as Ireland. You can write off 80% of the “cost” of the IP, i.e. reducing your effective tax rate from 12.5% to 2.5%, before of course deducting any other expenses. Outside of accountancy and legal firms, I can see no jobs here as the real activities will be outside of Ireland.

Proposal number two is in relation to tax credits for R & D, covered by Sections 766 & 766A. This enables a company to deduct the cost of R & D, and also to get an additional tax credit of 25% of the cost incurred. They suggest that the amount of outsourcing be increased and in relation to many SMEs this would make sense. However, again the main concern is multi-nationals “For example, for pharmaceutical companies, clinical trials must be outsourced and they are a significant part of the R&D cost.“ This work would also not be done in Ireland.

Proposal number three is in relation to “Carried Interest”, which is basically a method of senior managers in venture capital firms earning loads and paying no tax.

Proposal number four is in relation to the pooling of foreign tax credits. Credit for foreign tax is specific to that income source, e.g. tax withheld on Spanish income can only be offset against profits from your activities in Spain. The problem arises that the withholding tax payable in some countries exceeds the Irish tax payable on the Irish measure of income. The taskforce want pooling, i.e. you can claim your excess Spanish tax against, say, your profits from Germany. This proposal runs counter to all normal treatment to avoid double taxation.

Proposal number five in relation to withholding tax on payments is just another sop to multi-nationals.

The final proposal is in relation to Patent Income Exemptions, which the 3rd Commission on Taxation, which has recently reported suggested should be terminated. They of course feel it should be retained.