Ireland life

Ireland is seeking to build on its R&D success as a European leader in life sciences manufacturing. Tom Maher and Catherine Galvin report

A recently published report by Cap Gemini Ernst & Young, entitled ‘EU Enlargement – Driving Change in the European Life Sciences Industry’, reinforced Ireland’s attraction as a location for life sciences manufacturing, based on statistics for the period 1997-2002.

The report contains statistics regarding the relative strengths of individual EU states as bases for various life sciences subsector industries, categorised as: research and development (R&D)-intensive pharma (patented drugs); non-R&D-intensive pharma (generics and over-the-counter (OTC)); biotech; and medical devices.

Based on certain weighted location decision criteria, the report concludes by ranking EU states in four classes – Best in Class, Second Best, Middle and Last in Line. Ireland is very positively rated as Best in Class for R&D-intensive and non-R&D-intensive pharma, and Second Best for biotechnology and medical devices.

Against the above statistics, a number of recent developments have demonstrated that Ireland Inc has its finger firmly on the pulse in addressing many of the most important location decision criteria identified in the report. Among the most heavily-weighted criteria were the level of corporate taxes, the availability of tax incentives for R&D activities and the ‘research climate’.

Ireland’s commitment to a low level of corporate taxes is well documented. The remainder of this article focuses on recent developments in terms of the other two criteria identified above.

New tax incentives for R&D activities

In the Finance Act 2004, the Irish government introduced a 20 per cent tax credit for qualifying R&D expenditure, in addition to the existing deduction and capital allowances available for R&D expenditure. Only expenditure in excess of that incurred during a defined base year will qualify for the tax credit.

For 2004, 2005 and 2006, the applicable base year will be 2003. Thereafter there will be a rolling one-year base (that is, for 2007 the base will be expenditure incurred in 2004 and so on). Separate relief, over a four-year period, is also provided for expenditure incurred on a building used for the purposes of R&D.

The attraction of such significant relief is readily apparent. Take, for example, a multinational group with operations located in a high-tax jurisdiction such as Germany, where the corporate tax rate, together with local trade taxes, can bring a company’s tax burden to as much as 35 per cent. There is a certain logic in having the group’s R&D expenditure incurred in that jurisdiction. In Germany, €100 (£67.70) spent could save €35 (£23.70) of the group’s total tax bill.

Prior to the introduction of the Finance Act 2004, €100 spent on R&D in Ireland would have saved the group €10 (£6.80) or €12.5 (£8.50), depending on the tax rate that applies to the group’s Ireland-based company. By introducing R&D credit relief, Ireland has provided the group with a total saving of up to 32.5 per cent on qualifying expenditure.

The legislation has been broadly welcomed by industry as a step in the right direction. However, there has been a good deal of debate about some potentially problematic areas: the definition of R&D; the limitation of the tax credit to incremental expenditure marked against a defined base year; and the curbing of R&D subcontracting to 5 per cent of total expenditure.

Definition of R&D

Under the legislation, activities will not be regarded as R&D unless they involve the resolution of scientific or technological uncertainty.
Opinions have been expressed that the question of what represents a resolution of scientific or technological uncertainty may be capable of subjective analysis.

Other countries have issued practical guidelines on what constitutes qualifying R&D for their purposes. The Irish legislation does provide for the development of guidelines and it is hoped that some will emerge in the future following appropriate levels of consultation with industry.

Incremental expenditure

The incremental expenditure concept has been met with some disappointment by industry groups that had been pushing for a volume-based approach, as has been used in other jurisdictions.

For multinationals and indigenous companies alike, the issue arising is that the relief will only be of long-term benefit to the extent that there is a commitment to ongoing increases in expenditure on a year-to-year basis.

Moreover, the legislation may not reward entities that have conducted R&D activities in Ireland in the past.


The legislation confines the relief to expenditure incurred “in-house”.
The one exception is for expenditure of up to 5 per cent, in respect of payments to a university or other third-level education institute.
This issue is obviously of particular concern to smaller companies that incur R&D by using third-party resources.

‘Research climate’ initiatives

There has been much debate about innovation and enterprise during Ireland’s EU presidency, and the level of progress made by member states to increase R&D spend to meet the EU target of 3 per cent of gross domestic product by 2010.

The current R&D spend in Ireland needs to increase significantly to approach the 3 per cent Lisbon target. The Irish government is responding to the challenge, however, and has committed approximately €2.5bn (£1.69bn) to research in the National Development Plan 2000-2006. Some of this spend is directed through the Science Foundation Ireland (SFI) and Programme for Research in Third Level Institutions (PRTLI).

The role of SFI (established as a statutory body in July 2003) is to establish Ireland as a centre of research excellence in strategic scientific areas related to economic development, particularly biotechnology and information and communications technology.
Through the SFI, $646m (£369.2m) is being invested in research between 2000 and 2006. As of 31 March 2004, €338m (£228.7m) of awards have been approved, with €144m (£97.4m) awarded to biotechnology.

The PRTLI is a research development programme for the higher education sector where grants are administered by the Higher Education Authority. Funding is obtained from a combination of public and private sources, and since 1999 €600m (£405.9m) has been allocated for research spending in third-level institutions.

Through initiatives of this kind, it is hoped that Ireland will foster an environment of cooperation between research-based industry, the state and academic research institutions.

National Code of Practice for Managing Intellectual Property
from Publicly Funded Research

Launched by the Tánaiste Mary Harney in April 2004, and developed by the Irish Council for Science Technology and Innovation (ICSTI), a government advisory body on science and technology, this code has been developed to address concerns regarding the level of management and commercialisation of IP from publicly-funded research in Ireland.

The code is non-binding, and aims to harmonise IP management systems across public research organisations (PROs). It does this by setting out guiding principles in the key areas of IP management strategy, technology transfer offices, identification and disclosure of IP, protection and ownership of IP, commercialisation and the sharing of benefits.

Interestingly, the Tánaiste announced at the launch that she had requested the ICSTI to begin developing guidelines immediately for the management of IP from public-private co-funded research, in consultation with industry, research funding bodies, PROs and the financial community.

Tom Maher and Catherine Galvin are corporate partners at Matheson Ormsby Prentice in Dublin