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Ireland announces a special tax rate for 'Knowledge Development Box'
Ireland announces a special tax rate for 'Knowledge
Posted 15/10/2015 by Kali Sanyal
Following the announcement regarding the new policy framework set out in the ‘Road Map
for Ireland’s Tax Competitiveness’ as published in October 2014, the Irish government
declared on 13 October 2015 that from next year it would cut the corporate tax rate to 6.25
per cent from the existing 12.5 per cent for revenues tied with companies’ patents and
certain intellectual property (IP).
The new tax rate is aimed to offer a lower effective rate for onshore exploitation of IP and to
attract IP from offshore locations to further support investment by multinationals in Ireland.
Based on recent European and OECD developments, the Knowledge Development Box (KDB)
is going to apply to a narrow category of IP, primarily generated by Irish research and
development (R&D) and it will therefore form part of the solution for those wishing to bring
Currently the European Commission (EC) has been conducting an investigation into Ireland’s
‘special tax deal’ with the multinational company (MNC) Apple, which reportedly uses
Ireland to channel almost all of its non-US profits through Irish companies. The
investigation was prompted from allegations that the deal was secret for one company and
the offer was not meted out across the board. If proven, Apple may have to pay back tax
shortfalls going back 10 years.
There was a perception that Ireland would take measures so that MNCs can sidestep this EC
dictate, and thus came up with this general concession with 6.25 per cent tax rate for all the
companies with R&D and IP.
As is widely acknowledged, knowledge-based capital has become a significant driver of
profits in many MNCs. As a result, certain countries have introduced regimes commonly
known as Patent Box regimes which are a form of preferential arrangement that provides an
effective tax rate for IP income that is below the normal headline rate of corporation tax in
the jurisdiction in question. In a move to keep the US MNCs based in the USA and thwart
the European drive to lure them to EU countries, the US Congress recently released a
discussion draft of proposed legislation that would enact a patent box regime in the United
States. The package is termed ‘Innovation Box’ and will charge companies a 10 per cent tax
rate on income they generate from patents and other intellectual property. Similar
legislation already exists in several European countries and the EU move is considered to be
threatening to US budget position. Worse, European countries are expected to start
requiring U.S. and other firms to move research jobs to qualify for their patent boxes.
The OECD’s Base Erosion and Profit Shifting (BEPS) project addresses these income-based IP
regimes and puts into focus harmful tax practices under Action 5. BEPS aims to ensure that
the preferential tax treatment regimes of certain member countries fulfil the substantial
activity requirement— thereby preventing their being deemed harmful. The work is building
upon previous work carried out by the OECD and essentially involves a detailed elaboration
of principles laid out in the 1998 report on harmful tax practices.
One likely consequence is that the BEPS project may ultimately drive MNCs to choose a
location to develop their IP, where they align taxing rights more closely with the substance
of their operation. As such, MNCs will have to show real substance in specific jurisdictions in
order to be able to qualify for tax benefits. The Irish government reportedly designed the
tax system to cover such income-based IP regimes so as to ensure that tax benefits arising
under preferential regimes for IP are directly related to real economic activity. Experts
however expressed doubt that this package would ultimately drive the transfer of MNC R&D
from some established locations in USA to Ireland.
For some time, international tax competition has been intense, particularly in Europe. Just as
in Ireland, MNCs are also allegedly using the Netherlands and Luxembourg to shift their
profits from elsewhere to pay less or no tax at all. What’s more, the United Kingdom has
recently announced that it would reduce company tax rate from the present 20 per cent to
18 per cent by 2020. Given this competitive environment and the likely erosion of its
revenue base further, the Irish government proposed this new measure to thwart such
competition from its bigger neighbours.
According to the Irish Finance Ministry, attracting investment that generates economic
activity with real substance has been a central column of the Irish taxation system for more
than 50 years and it is within this context that the introduction of the KDB has been