R&D tax credit

1. R&D tax credit IMDA 6 July 2011 Stephen Merriman Aidan Lucey

2. Agenda Evolution of R&D tax credit scheme Provisions of scheme Monetisation mechanism R&D legislative caps What is R&D? “Above the line” treatment R&D in Medical Devices Sector Revenue Audits Grants

3. Evolution of R&D tax credit scheme

4. R&D tax credit - Provisions of scheme Introduced in 2004 as part of EU Framework for increasing R&D activity Enhanced in successive Finance Acts Cornerstone of Irish economic policy

5. Provisions of scheme

6. R&D tax Credit - Provisions of scheme Tax credit of 25% for incremental expenditure on R&D  effective CT deduction of 37.5% Incremental basis - Base year frozen at 2003 Includes both revenue and capital expenditure - salaries - direct / indirect costs - equipment

7. R&D tax credit – R&D Buildings Previous requirement for buildings to be used “wholly and exclusively” for R&D Finance Act (no.2) 2008 introduced 35% R&D activity threshold – relevant for R&D carried on in manufacturing environment Full credit available in year in which expenditure is incurred

8. R&D tax credit - Provisions of scheme • Revenue expenditure • • - Incremental R&D expenditure • - Labour costs • - Consumables/utilities • Qualifying R&D: €10m • Credit 25%: €2.5m • Effectively reduces R&D salaries etc by 25% • Capital expenditure • - Incremental R&D expenditure • - Plant & machinery • - Computers • Qualifying R&D: €10m • Credit 25%: €2.5m • Effectively reduces cost of P&M by 25% IMMEDIATE CASH SAVING 100% TAX DEPRECIATION

9. R&D tax credit - Provisions of scheme Credit is used against corporation tax liability in first instance or set back against prior year Credit can be surrendered to group companies “Monetisation” of credit - excess credit repayable (subject to greater of corporation tax or PAYE cap) Benefit of credit can be taken “above the line”

10. Monetisation Mechanism

11. R&D Credit – Monetisation mechanism Set off against Corporation Tax liability in current year (Year 1) Carry back of excess to prior year Repayment of one-third of unutilised excess (subject to cap) Balance remaining carried forward for offset against Corporation Tax liability in Year 2 Repayment of 50% of unutilised R&D Tax Credit in Year 2 (subject to cap) and balance carried to Year 3 for offset against Corporation Tax Liability Any amount unutilised at end of Year 3 repaid (subject to cap)

12. R&D Credit – Monetisation mechanism 5 1 3 2 4 Used in Prior year = (€1,000,000) Refunded in Year 1 = (€333,333) R&D Excess Credit utilised Used in Year 2 = (€500,000) €2,000,000 Refunded in Year 2= (€83,334) Used in Year 3 = (€83,334)

13. R&D legislative caps

14. R&D tax credit – legislative caps Restriction on payments to 3rd parties - sub-contractors (10%) - universities (5%) Credit cannot be claimed on expenditure which is deductible in another EEA state Refundable credits restricted to corporation tax or PAYE cap All claims - 12 month window

15. “Above the Line” treatment

16. “Above the line” treatment Ability to take benefit of credit “above the line” in P&L Increases competiveness of Ireland as R&D centre Treatment acknowledged by ICAI / Revenue Has been adopted in practice under Irish GAAP Treatment under US GAAP is more ambiguous

17. What is R&D?

18. R&D tax credit – What is R&D? Fundamental characteristics of qualifying R&D: • Field of science or technology • Systematic or investigative approach • Seek to achieve scientific or technological advancement • Must be scientific or technological uncertainty present • Must be Basic Research, Applied Research or Experimental Development

19. R&D tax credit – What is R&D? Experimental development is very broad: “Work undertaken which draws on scientific or technical knowledge or practical experience for the purpose of achieving technological advancement and which is directed at producing new, or improving existing, materials, products, devices, processes, systems or services”

20. Design and Prototype Build What is qualifying R&D? Addressing contractual arrangements Non-qualifyingactivities Processing intellectual property Marketing and budgeting for new product Duplicating an existing process or technology in a new way Improvements toexisting products Creating a new process, material,device or product Activities in relation to product commercialisation Other R&Dentitlement Core R&D Scale up in production Resolving production problems that require R&D input Support Services such as equipment maintenance, cleaning and repair Design solely for cosmetic and aesthetic reasons Management input to project meetings Process Improvements Concept and idea feasibility analysis R&D Tax Credit

21. R&D in medical devices sector

22. R&D in medical devices sector Traditional manufacturing activities have provided a springboard for companies to expand towards R&D in recent years Generally in the field of medical sciences, natural sciences and engineering Credit should be available in respect of both development of new devices and operational excellence (i.e. process R&D)

23. R&D in Medical Devices sector - issues Sub-contractors Collaboration with universities Customer specifications Validation batches Who is doing the R&D?

24. R&D in medical devices sector Scale up often involves technological problems because of cost or reliability. Manufacturing/production departments may make process changes to improve efficiency or speed or reduce cost. Iterative changes, e.g. to reduce the materials used may also qualify as uncertain how much can be taken out All these process changes may comprise R&D but the costs are often booked in cost of goods sold and in departments not included in the scope of claims and therefore omitted

25. Revenue Audits

26. Revenue Audits 2 elements to Revenue audits: Financial - computation of credit /nature of costs / base period - apportionment of overheads / P&M Technical - review of activities - site visit by ‘expert’ in particular field

27. Revenue Audits Preparation for Revenue queries – ‘Defence File’

28. Revenue Audits Expanded list of Revenue queries

29. Grants

30. Grants Companies who qualify for R&D tax credits may also qualify for R&D grants Qualifying expenditure – capital, salaries, materials, travel, consultancy, technology, overheads Average grant rate – 20% of total expenditure Collaboration with universities can increase the grant rate Grant funding cannot be retrospective Other types of grant may also be available

31. Questions?