Thursday, 9 December 2010

The (bad) luck of the Irish: patent tax exemption bites the dust

Back to the dark ages for Irish
patent royalty taxation?
IP Finance has just learned that, in the Summary of 2011 Budget Measures, (See p B7 here), delivered to the Irish Dail yesterday, the provision for tax exemption for patent royalties was removed. Until now, income derived from patents was exempt from taxation (up to a cap of €5 million). The statutory basis for this relief is Section 234 of the Taxes Consolidation Act 1997.

This exemption has been removed with immediate effect (in fact, if the Budget Measures document is to be believed, the exemption vanished two weeks ago, on 24 November). This is an extraordinary measure to introduce out of the blue and it lends no thought to companies (especially start-ups) which may have based some of their cash projections on their (already meagre) royalty incomes.  IP Finance's source, Andrew Waldron, comments:
"Perhaps it seemed like something easy to dispose of, but it is an especially curious measure given that the Irish Government's line over the last number of years has been to champion R+D and the creation of IP in the economy. Plus, I would have imagined that they should have maintained any measure that offered even a glimmer of the possibility of job creation".
Andrew would be curious to know readers' thoughts on this and he asks if we know of other such exemption schemes in other countries? Have they succeeded in fostering innovation/luring large R+D companies? Could the UK benefit from the removal of the Irish exemption?

The feeling of this blogger is that it is indeed extraordinary. I have no direct data, but I had imagined that the tax exemption for royalty income was a useful carrot to dangle in front of small businesses but not one which would often be nibbled, given the arduous task of turning innovations into patent-protected streams of royalty income.  Anyway, responses to Andrew's questions are very much welcome. Please post them below if possible.


Anonymous said...

My guess is that this hits hard at companies who have operations in both the UK and the Irish Republic, and who will have been ensuring that the IP arose in the Republic and was then licensed (by way of intra-group informal and possibly undocumented arrangments)to the UK operation.

It would be interesting to know the figures - I suppose the Irish Government has them, but I do not recall seeing them published anywhere.

Anonymous said...

Without wishing to seem sanctimonious or be published, I have to observe that as I understood it, the exemption applied to royalties on granted patents irrespective of their merit or the contribution they made to the art. It could be viewed as the case that with some imagination granted Irish and British patents of very narrow scope are not that hard to obtain and as such obtaining a patent was a worthwhile investment for pure tax reasons if company A holds the patent and licences it to company B which is part of the same group of companies. I am not saying that all Irish patent proprietors filed applications for tax reasons alone, but I am sure that some did. I am not convinced such activity did much to assist in the creation or maintenance of employment (other than for the IP types employed to get the patents).

Mark Stern said...

Again, without figures on the amounts of revenue which escaped the tax net because of this exemption, it is hard to know how many or what type of individuals or companies availed of this. Although as the UK is preparing to revamp its take on patent revenue, it is worth considering if such measures have any effect at all? Perhaps the conclusion is that modifying royalty taxation schemes is really of little value to governments or innovators.

Niamh Hall said...

The figures in the Commission on Taxation Report 2009 were that in 2006 the incentive was used by 1100 entities and cost €84 million. It is a pity that it's gone, as it was a useful incentive to innovation and inwards investment.