The importance of foreign direct investment (FDI) to our economy is undisputed. However, what has become clear in recent times is our need to attract FDI that will generate investment in research and development (R&D) here, boosting the creation of "high end" jobs. Without FDI, Ireland will not be able to trade its way out of the current crisis and next year's budget is likely to be far more severe than last Tuesday's.
Let's start with the basics. For the next five years, companies are entitled to a tax credit of 25% of their incremental R&D expenditure over that incurred in 2003, with the latter year being a fixed "base year" until 2013. So maybe "basic" is the wrong word. Why should a company have to look back at 2003 when calculating the appropriate R&D tax credit figure in 2012?
At present, companies can only offset the R&D tax credit against corporate tax liabilities. The reality is that Tuesday's budget has increased the cost for multinationals to attract "world class" individuals to Ireland. Higher tax means additional remuneration required to leave the individual in the same net position.
Companies need the ability to offset the available R&D tax credit against costs such as employers' PRSI (currently 10.75% of gross pay).
This would go some way towards mitigating the adverse affects of Tuesday's tax increases.
The only change introduced last Tuesday was to increase the tax credit from 20% to 25% which, while welcome, may not on its own provide enough incentive to companies.
The minister also needs to simplify the current system by rewarding ongoing R&D expenditure. A company should be encouraged to invest in R&D on a yearly basis, regardless of expenditure incurred in an arbitrary year, fixed only by virtue of the year the legislation was introduced.
Such a system would also bring us into line with many of our neighbours (such as France and Britain). Indeed the fixed base year (2003) is a disincentive to some companies to carry out R&D in Ireland if their expenditure in 2003 was exceptionally high.
Why should we be so concerned about attracting leading individuals to our country? Put simply, the more cutting-edge personnel we can attract to Ireland, the better our chance of developing the full potential of our – by European standards – exceptionally young population. Furthermore, a large multinational is more likely to remain in Ireland if its senior people are based here.
What should also be borne in mind is the pyramid effect of bringing these individuals to Ireland in terms of the number of Irish people whom they will develop, who in turn will develop a further generation. This can only have a positive effect on the exchequer balance in increased income tax receipts and, over time, increased corporation tax receipts as the R&D translates into profit. Universities could also be expected to gain significantly from increased R&D spending, particularly if the US model is followed here.
The short-term pain in terms of tax refunds to large corporates will be more than compensated for by the boost in high-end job activity, the development of a highly skilled indigenous workforce and the positive impact on exchequer receipts (including the income tax directly deducted from the salaries of arrivals).
The fact that some of the tangible benefit of any current moves by the minister will not be felt for several years should not discourage him from taking action now to protect our future.
Peter Vale is a tax director with Grant Thornton