Ireland's 'patent box' inspires US tax reform

Irish PM Enda Kenny. Photo / Getty Images

Tax inversions are so 2014. One of the burning questions in global corporate tax circles these days is: Who will win the race to build the most attractive "patent box"?

This is a term Europeans use to designate the system of tax breaks on royalties from patents that countries use to lure foreign investment and encourage innovation at home.

Britain set up a patent box in 2013, and Italy announced last week that it would follow suit. Ireland is considering a "knowledge development box", an expansion of a longstanding system that has helped the country thrive in recent decades. The idea has crossed the Atlantic, too: House Ways and Means Committee Chairman Paul Ryan gave a ringing endorsement to a plan under consideration in Congress.

As with so many other tax policies, this clever stratagem has unlikely origins. The strange story of the patent box features the Irish in a starring role, along with a famous, if ill-fated politician — also named Ryan.

Ask about Richie Ryan in Ireland today and the answer is likely to be a snort of derision: "Do you mean Richie Ruin? The Minister of Hardship?" Those were the nicknames given to this unfortunate member of the centrist political party Fine Gael who served as his country's finance minister from 1973 to 1977.

Ryan had the misfortune to ascend to the post just as the Organization of Petroleum Exporting Countries plunged Ireland, and most advanced industrial nations, into recession.

For four years, he struggled against a torrent of economic woes. In 1976, faced with a spiraling budget deficit, Ryan raised taxes aggressively on alcohol, gasoline, cigarettes, and other goods and services. He even imposed a whopping 80 per cent tax on the top income bracket, earning him the sobriquet of "Red Richie".

His actions made him infamous, and an object of ridicule. A satirical television show, Hall's Pictorial Weekly lampooned him in sketches. His comic doppelganger, the "Minister of Hardship", appeared in a Scrooge-like costume and lectured viewers on the virtues of high taxes and the pleasures of gruel rations. The segments were a huge hit, and may have contributed to toppling the coalition government in the 1977 elections.

That was a period many in Ireland preferred to forget, but lost in this amnesia was Ryan's signal achievement: the creation of the patent box. This innovation arguably laid the foundation for a resurgence of the economy in the 1980s and 1990s, when high-tech corporations moved to Ireland in droves to take advantage of the generous tax breaks. And it has become a model for nations everywhere eager to lure intellectual property.

When Ryan became finance minister, he began preparing a detailed budget for presentation to the lower house of the Irish National Parliament. On May 16, 1973, he declared: "I have been considering the possibility of tax relief for inventors who contribute to industrial development and improved competitiveness."

This had been a cause of concern in the national press for some time: industrial innovation had long languished in Ireland, and newspapers lamented the paucity of home-grown patents.

Ryan tackled the issue directly: "To encourage research and development in Ireland and to stimulate inventions I propose to provide in the Finance Bill for the exemption from tax of all income from royalties on patents first registered in the this country."

The germ of an idea that Ryan presented that day eventually became Section 34 of the Finance Act of 1973. When he formally presented the budget, he described the patent provision as "a most significant section which I believe will have far-reaching beneficial effects in stimulating research and development in this country."

Ryan sold the plan as a way to attract foreign companies: "We shall be able to bring to Ireland a great deal of research and development activity which would otherwise not come here."

The finance minister noted that Ireland had the lowest rate of investment in research and development in the West, a situation that left many graduates of the nation's technical colleges without employment. Many of these were leaving the country. This tax break, he believed, would help reverse that trend. But he also had a deeper ambition: foreign investment was nice, but fostering home-grown innovation was even better.

The plan sailed through the lower house. But the economy, beset by inflation, stagnation, rising deficits and other ills, entered a decade-long slump. Ryan's ineffectual response to the crisis cemented his reputation as a humorless, bean-counting proponent of crippling taxes and endless austerity, and he became a symbol of all that was wrong.

That characterisation was unfair. It took years for Ryan's 1973 proposal to bear fruit, but eventually it did. Ireland's generous tax treatment of intellectual property, combined with other proposals aimed at luring high-tech companies, gradually, almost imperceptibly, helped make the nation a hub of innovation.

Today, nine of the top 10 US technology companies have a significant presence in Ireland; as do nine of the top 10 global software companies. And the country's own tech sector is booming, especially in Dublin, which has been dubbed "Europe's Silicon Valley".

The Organization for Economic Cooperation and Development ranks Ireland No. 1 for value-added in information and communication technology, far surpassing Japan, South Korea, and a host of other high-tech countries.

Improbably, Ireland eventually became the country that Ryan envisioned. It just took more than 40 years to happen.

And that's something for the other Mr Ryan to ponder as he goes about devising a US patent box.

• Stephen Mihm, an associate history professor at the University of Georgia, is a contributor to Bloomberg View.

- Bloomberg