Earlier this year, the Irish Revenue Commissioners (“Revenue”) published updated guidelines on Ireland’s research and development (“R&D”) tax credit regime (the “Guidelines”). The Guidelines follow recent legislative amendments which expand Ireland’s tax incentives for R&D activities and further enhance Ireland’s attractiveness as a location for developing intellectual property.
Under Irish tax law, a company can claim a tax credit of 25% of qualifying expenditure, in addition to the standard corporation tax deduction, in respect of certain expenditure incurred in carrying out R&D activities across a broad range of sectors. The tax credit is available to off-set against a company’s Irish corporation tax liability. Excess credits may be carried forward for offset against future profits or may be repaid to the taxpayer in certain circumstances.
The Finance Act 2014 introduced changes to improve the tax credit available for expenditure incurred by companies on R&D activities. Of particular note is the change to a volume-based regime. Previously, the tax credit available for qualifying R&D expenditure was only available on an incremental basis. The credit was limited to the amount by which expenditure on R&D exceeded the expenditure incurred in 2003 (the designated base year). Although the base year threshold had been incrementally eroded in recent years, its complete removal means that the R&D tax credit can now be claimed in respect of all qualifying expenditure incurred in accounting periods commencing on or after 1 January 2015.
The Guidelines provide an updated insight into Revenue’s interpretation and application of the R&D tax credit regime. The Guidelines are more detailed than previous Revenue guidance and convey an increased emphasis on the scope of qualifying expenditure and the importance of supporting documentation. The Guidelines also set out Revenue’s view on the appropriate treatment of expenditure incurred on outsourced R&D activities and the transferability of unused credits between group entities.
Under the legislation, costs which are not incurred wholly and exclusively in carrying on the R&D activity do not qualify when calculating the credit. The Guidelines list a number of examples of such costs, including insurance, travel, repairs, maintenance and interest. The Guidelines also provide guidance on the treatment of staff costs for the purpose of the credit.
Documenting R&D Activities
The importance of maintaining accurate, contemporaneous records in support of claims for R&D tax credits is emphasised in the Guidelines. A taxpayer should maintain sufficient contemporaneous supporting documentation to demonstrate that the activities in question are qualifying R&D activities and that all costs incurred in carrying on those activities have been properly accounted for. A failure to maintain adequate records may result in a claim for the R&D tax credit being disallowed. The Guidelines confirm that electronic records are sufficient in this regard. Revenue accept that disparities exist in record keeping practices across different industries.
It is anticipated that the enhanced R&D tax credit regime, coupled with the new Irish knowledge development box (in respect of which initial draft legislation was issued in July 2015), will further incentivise Irish headquartered companies and multinationals to locate their R&D activities in Ireland.
This article first appeared in the International Tax Review, 21 August 2015.