www.pwc.ie Innovation Tax Incentives March 2017
1. R&D tax credit Regime Key Benefits Headline tax credit of 25% for expenditure on qualifying R&D activities Overall effective corporation tax credit of 37.5% 25% tax credit for qualifying R&D spend and 12.5% corporation tax deduction Tax credit is firstly utilized to reduce corporation tax liability If the corporate tax liability is less than credit, then there is an ability to get cash payments for the credit over a 3 year cycle There is an ability to account for the benefit of R&D credit above the line in the accounts (reduces net costs of R&D activity in the accounts) Mechanism to use the R&D credit to reward key employees 2
R&D Tax Credit Qualifying Expenditure 1. Revenue expenditure Revenue R&D expenditure R&D Labour costs R&D Materials & Consumables 2. Capital expenditure Capital R&D expenditure Plant, machinery, equipment used for R&D Computers/IT Infrastructure used for R&D CASH SAVING Cash Saving Qualifying R&D: 10m Qualifying R&D: 10m Credit 25%: 2.5m Credit 25%: 2.5m Effectively reduces R&D salaries/consumables etc. by 25% Effectively reduces cost of P&M by 25% 3
R&D Tax Credit What is qualifying R&D Activity? The FIVE pillars of R&D: i ii iii iv v Systematic Investigative or Experimental activity In a Qualifying Field of Science or Technology Must be Basic Research, Applied Research or Experimental Development Seek to Achieve Scientific or Technological Advancement Must Attempt to Resolve Scientific or Technological Uncertainty 4
R&D Credit High Level Illustrative Example High Level Example: In the year ended 31 December 2016, R&D Co Ltd, who undertakes R&D activities, incurred qualifying R&D expenditure of 4m. R&D Co Ltd Turnover 11,000,000 Qualifying R&D costs (4,000,000)* Non Qualifying R&D costs (6,000,000) Taxable profits 1,000,000 Corporation tax @ 12.5% 125,000 R&D credit - 4m @ 25% (1,000,000)* Corporation tax liability 0 Potential R&D Credit Monetised (over 3 year period) 875,000 5
2. Knowledge Development Box ( KDB ) Effective tax rate of 6.25% on qualifying profits from qualifying IP Qualifying IP - Registered Patents and Computer Programs (copyrighted software) The profits qualifying for the 6.25% rate are driven by the following: calculate the profits directly attributable to the qualifying IP and then calculate the proportion of such profits that are attributable to qualifying R&D costs incurred by the Irish company in developing the IP In order to qualify/maximise the benefit of the 6.25% rate: - Irish company must undertake qualifying R&D to generate qualifying IP - Irish company must hold and own the qualifying IP - Irish company must carry on a trade that exploits/utilises the IP 6
Knowledge Development Box ( KDB ) High Level Example Calculation: Irish company has total profits in the year of 100m Income directly attributable to the patent in current year - 50m Expenditure attributable to the patent in current year - 10m R&D expenditure on the Patent - 30m R&D undertaken by Irish company - 5m (qualifying expenditure) Outsourced to third parties - 1m (qualifying expenditure) Outsourced to group companies - 4m (non qualifying expenditure) Group expenditure on patent in previous years - 20m (non qualifying expenditure) The Profits that qualify for the KDB rate are determined by the below Formula: Qualifying Expenditure ( 6m) + Uplift Expenditure* ( 1.8m) Overall Expenditure ( 30m) x Profit attributable to IP ( 40m) Qualifying Profits = 10.4m (subject to 6.25% rate) * Uplift expenditure is the lower of 30% of qualifying expenditure or the aggregate of the acquisition costs and group outsourcing 7
3. IP Amortisation Regime IP Amortisation Tax Relief: Tax relief for expenditure incurred on the acquisition of a specified intangible asset (see defined on next slide) Relief provided by way of annual tax deduction for the expenditure incurred on the acquisition of the specified intangible asset. The annual tax deduction that can be claimed is as follows: the IP amortisation charge expensed to the accounts or a deduction for the capital expenditure incurred over 15 years The specified intangible asset must be used in a trade carried on by the Irish company, for example: trade of exploitation/licensing of the Specified Intangible Asset trade of sale of goods and services deriving their value from the Specified Intangible Asset etc. 8
IP Amortisation Regime Specified Intangible Assets include the following: Patents, registered design, design right or invention, Trademarks, trade names, trade dress, brand, brand name, domain name, service mark or publishing title, Any copyright or related right within the meaning of the Copyright and Related Rights Act 2000, Computer software or a right to use or otherwise deal with computer software, Any application for the grant or registration of anything above, Secret processes or formulae or other secret information concerning industrial, commercial, or scientific experience, whether protected or not by patent, copyright or a related right, including know-how, Any license of an intangible asset outlined above, Goodwill directly attributable to any of the above assets Customers lists not transferred as a going concern 9
Key Contacts Stephen Merriman R&D Tax Incentives Leader T: +353 1 792 6505 stephen.merriman@ie.pwc.com Tom Fleming R&D Tax Incentives Senior Manager T: +353 1 792 7537 thomas.fleming@ie.pwc.com Cathal Noone R&D Technical Senior Manager Electronic Engineer & Chartered Accountant T: +353 1 792 5318 cathal.p.noone@ie.pwc.com 10