The plan for Ireland to replace the Double Irish tax scheme with new intellectual property (IP) incentives named by Michael Noonan, finance minister, as a Knowledge Development Box, or more commonly termed a Patent Box in other European countries, is a good idea. However, despite the sudden conversion of the defenders of conventional wisdom to talking-up the opportunities of attracting more FDI (foreign direct investment) exporting companies of substance, we will not be on a pitch with an open goal.
Michael Noonan said in his Budget speech on Tuesday:
In Part 1 we referred to groupthink and it's a very rare government report that gives space to weaknesses as well as strengths.
Coupled with that we can easily believe our own spin/ propaganda when bodies like the European Commission and the OECD accept Irish data at face value.
The 2013 EU Industrial R&D Investment Scoreboard has Ireland in the top 10 for company R&D spending with 16 companies - it said that in Ireland "Seagate Technology (12.6 %), Covidien (12.5%) and Accenture (11.2%)," accounted" for "60% of the R&D of companies based in Ireland."
Nine of the 16 are foreign companies with Irish headquarters; 2 are banks; the former Elan is included; Kerry has a 6th rank and Glanbia 657 of the top EU 1,000.
The biggest danger is that policy makers at the Department of Enterprise, Jobs and Innovation, do not realistically assess the challenges while officials at IDA Ireland go along with their views.
The Innovation Taskforce, which reported [pdf] in March 2010 said there was potential for "net job creation in high-tech firms of the order of between 117,000 and 215,000 between now and 2020."
So by next March at least 60,000 additional science and technology jobs should have been added.
The 28-strong group of mainly insiders, wrote: "Ireland might aspire to be a leader in Europe and aim to have 15% of employment concentrated in high-tech firms. This would result in almost 346,000 people being employed in high-tech firms by 2020 - - a net increase of 215,000 jobs over the period."
There was total employment of 172,000 in FDI exporting firms at end 2013.
In April 2014, The Global Information Technology Report 2014, produced by INSEAD, the French business school, the World Economic Forum and Cornell University gave Ireland a 26th rank, up from 27 in 2013.
Finland was on top.
A Patent Box
The patent box regime has got a lot of attention in recent times since the UK regime took effect in April 2013 with a phase-in of a low 10% rate by 2017 on profits from patents filed in the UK or with the European Patent Office.
In 2010 the Dutch government improved its regime by lowering the tax rate from 10% to 5% and by eliminating the maximum applicable amount of the regime. At the same time the name of the patent box was changed to Innovation Box.
Other EU countries with similar systems operate in Belgium, Cyprus, Spain, France, Hungary, Luxembourg, Malta, and Portugal.
Switzerland announced changes in its corporate tax regime last month, under pressure from the EU, and it is planning to introduce a Royalty Box.
The FT reports that the European Commission has asked the UK Treasury to explain the patent box - - an almost £1bn a year tax break for profits from patented products and processes - - and show that it attracted genuine research investment.
Germany is now considering restrictions on German companies parking patents in the UK similar to a move by Austria while an industry lobby wants lower German taxes on IP.
Ireland's Department of Finance supports the Commission investigation of IP regimes, which it confirmed in a briefing document that was prepared for Simon Harris, the new minister of state.
“There has been a lack of clarity around the issue of patent boxes for some time, and therefore we believe there should be a thorough analysis of these measures.
On substance a problem for Ireland is that less than a third of IDA Ireland client companies spend any money on R&D and the research that is done is not at a level that merits much patenting.
Ireland has had a 25% R&D tax credit since 2004 and it has coincided with a significant rise in public science spending.
A 2006 plan had a goal that Ireland would be in effect be recognised as a "world class knowledge economy" by 2013 - when that didn't happen, a new objective was set "in which Ireland in 2020 is the best country in the world for scientific research excellence and impact."
The Irish Patents Office (IPO) received 390 patent applications in 2013 down from 561 in 2011. In 2006 935 applications were received with 838 from Ireland.
Filings at the United States Patent Office in 2013 where the country of origin of an application is based on the residence of the first-named inventor, had 1,039 application from Ireland, 829 (2011) and 403 in 2004 and 483 (2006).
Israel had 7,237 in 2013, Denmark 2,100, Netherlands 4,467 and Austria 2,167.
Fred Logue of New Morning IP consultants, did an analysis in 2012 of filings by 1) US companies with activities in Ireland; 2) tax inversion/ redomiciled firms with Irish headquarters and 3) indigenous firms.
He concluded that the R&D tax credit resulted in a rise in filings by the first category while in respect of indigenous firms, the "tax credit has been used as a way of getting 'free money' without any real attempt to protect the R&D results through patenting or other IP strategies."
The value of patents depend on quality which is an evolving metric but in the meantime counts give a rough guide of R&D significance.
Prof Andre Geim, the 2010 Nobel Prize in Physics winner with a Russian compatriot, wrote in 'Patents merely satisfy a professor’s pride,' Financial Times, July 2, 2012:
The Financial Times reported last May that of the 11,372 patents and patent applications worldwide relating to graphene, the UK has filed just 101 - - equivalent to less than 1%.
A 2013 study by Times Higher Education which produces university ranking put Ireland at the last of 30 countries behind Portugal for business funding of university research.- the Netherlands was third at $72,000 per researcher, Ireland was at $8,300.
There is no easy lunch ahead as several countries will race to the bottom on IP within the constraints of EU and OECD proposed limits.
Finfacts 2013: Irish Innovation: Evidence of science policy failure mounts
Related tax links
OECD BEPS Project submission from Finfacts: Ireland should embrace corporate tax reform - - includes analysis of underperforming indigenous tradable sector.
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