Firms undertaking research and development activities should be offered a minimum 35 per cent tax credit, according to a report published yesterday by the Irish Business & Employers Confederation (IBEC).

Tax Incentives to Promote R&D and Innovation recommends introducing tax breaks as a way of helping IDA Ireland to attract research investment and encouraging small and medium-sized businesses to invest in R&D.

The report highlights that investment in the Republic in R&D is just 40 per cent of the average in the EU, and the State is ranked 16th out of 26 OECD countries in terms of the proportion of GDP spent on research activities.

It says a minimum tax credit of 35 per cent should apply to all firms, although a higher rate of 50 per cent would provide a greater incentive in certain sectors. If necessary, the scheme could award different amounts of tax credit in regions to promote extra investment in areas of greater need such as the Border, midlands and west.

The report estimates that if Irish firms claimed €500 million in eligible R&D activity and an additional tax credit of 35 per cent was provided, the net cost to the Exchequer would be about €22 million. In the case of a 50 per cent tax credit, the net cost to the State would be €32 million.

The report, which was compiled by A & L Goodbody Consulting, also profiles international research which indicates that a 10 per cent reduction in the cost of R&D would lead to a 1 per cent increase in the amount of R & D in the short term, and a 10 per cent increase in the long run.

A tax credit scheme for firms undertaking R&D would have the beneficial spin-off of attracting non-national and returning Irish scientists to work in the Republic, says the report.

It predicts that a simple, predictable and easy-to-administer scheme could become operational, and in line with EU state aid guidelines, by January 1st, 2003.

The report also suggests extra support could be provided for small and medium-sized businesses undertaking R&D. This could take the form of a cash payment for loss-making firms, it says. Grants should also be considered to promote R&D.

The report recommends that a detailed cost-benefit analysis should be undertaken immediately by the Government, in relation to introducing tax incentives for research and development in advance of this year's Budget

At the launch of the report yesterday, IBEC director, Ms Jackie Harrison, said there was a strong case for tax incentives for R&D as part of a suite of measures to support research and development in the Irish economy.