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:
Companies now invest as much or more in knowledge-based capital as they do in physical capital such as plant and machinery. Consequently, I intend putting in place a ‘Knowledge Development Box’ along the lines of patent and innovation boxes which have existed for many years in countries that compete with us for foreign direct investment. I am launching a public consultation process to gather views on how the Knowledge Development Box should operate and I plan to legislate for it in next year’s Finance Bill or as soon as EU and OECD discussions conclude. My intention is that the Knowledge Development Box will be best in class and at a low competitive and sustainable tax rate. This intellectual property offering will be a key element in attracting future foreign direct investment to Ireland."
In Part 1 we referred to groupthink and it's a very rare government report that gives space to weaknesses as well as strengths.
Double Irish tax scheme axed; Conventional wisdom wrong again - Part 1
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.
The report said in respect of Silicon Valley: "It is estimated that 320,000 people are employed in 5,500 high-technology firms."
The analysis is an example of where a reality check was badly needed.
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.
Patent applications filed by German businesses in Britain increased 27% to 471 in 2012, ahead of the introduction of the patent box.
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.
“In particular, given the persistent calls on Ireland to introduce a patent box, it would be helpful to get guidance from the commission. Ireland can adopt a ‘wait-and-see’ approach on this issue,” the briefing noted according to an Irish Times report.
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.
US MNCs have preferred to do significant overseas R&D in Israel.
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.
In 2013 there were 333 applications where the first applicant was an Irish resident (including foreign-owned firms in Ireland) down from 492 in 2012 - - this is the lowest since the early 1980s according to World Intellectual Property Organization (WIPO) data.
Patent grants by the IPO in 2006 were at 357 and 214 in 2013.
European Patent Office (EPO) grants to Irish residents covering 38 countries were at 121 in 2006 and 187 in 2013.
The ratio per million inhabitants of EPO applications in 2013 was 115 in Ireland; the EU28 average was 129; the leaders were Switzerland 832; Sweden 402; Finland 360; Denmark 347; Netherlands 347 and Germany 328.
Patent Cooperation Treaty (PCT: 148 countries in 2013) patent applications were at 435 in 2013 , compared with 390 in 2012 and 481 in 2008
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.
Irish patent filings at European Patent Office fell in 2014
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:
When in 2004 my University of Manchester colleagues and I discovered graphene, a material one carbon atom thick with extraordinary industrial potential, I set about trying to patent it. When I approached a representative of a multinational electronics company, I received a put-down that I recall whenever I am asked about patents. 'If after 10 years we find graphene is really as good as it promises, we will put a hundred patent lawyers on it to write a hundred patents a day, and you will spend the rest of your life, and the gross domestic product of your little island, suing us.'”
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.
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