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Ireland announces a special tax rate for 'Knowledge

Development Box'

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

IP onshore.

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

considered.

Tags:

 Ireland

 OECD

 Taxation