As indicated in the recent Budget 2015, the Department of Finance has launched a public consultation process on framing a Knowledge Development Box (‘KDB’) regime.
The consultation document expressly outlines the Government’s commitment to ensuring a competitive tax offering for companies that engage in innovative and value creating operations in Ireland. The ambition is that the new knowledge development box will offer companies a ‘best in class’ regime, while ensuring that the regime is acceptable under proposed new international rules.
Ongoing projects being undertaken by the OECD (e.g. BEPS) and the EU Council Code of Conduct on Business Taxation have brought patent box regimes under scrutiny from an international tax perspective, and Ireland is committed to ensuring that any proposed regime is compliant with the outcome of these reviews.
Existing patent box regimes have offered a preferential effective tax rate to income generated from intellectual property where certain risks or functions were located in the host country.
However, in recent months there has been a clear shift in international focus on such knowledge development box regimes, and a commitment by a number of jurisdictions to ensure that any tax benefits from such a regime would be directly related to the level and quantum of real R&D activity being carried out in the host country. This approach is commonly referred to as the Modified Nexus approach, and the consultation document issued today indicated that the proposed Irish regime will follow a similar framework.
Key Consultation Principles
The aim of the consultation process is to assess how an Irish knowledge development box might be designed which offers companies a ‘best in class’ regime, whilst also being in line with current international consensus on what is acceptable for such a regime.
The consultation requests specific feedback on the following framework areas:
- Definition of Intellectual Property (the focus being on ‘patents and assets that are functionally equivalent to patents’)
- Qualification for the regime and compliance with the ‘modified nexus approach’
- Defining the nature of qualifying income and a basis for calculation
- Interaction with other domestic tax regimes, in particular loss relief provisions, R&D credits and capital allowances for intellectual property assets
- Development of a transparent framework which provides certainty for taxpayers and Revenue
- Application of a regime to small indigenous enterprises.
In addition to the specific consultation requests on the knowledge development box, the Department of Finance have requested feedback and informed views on enhancements to Irish FDI tax policy in general.
So what does it all mean?
It is very positive that the Department of Finance are standing by their commitment to introduce a best in class tax regime for companies looking to make knowledge based investment in Ireland. The introduction of a knowledge development box would further strengthen Ireland’s offering when attracting foreign direct investment.
However, the ongoing uncertainty regarding the outcome of the OECD/EU ongoing work streams in this area will undoubtedly have an impact on the ultimate design and implementation of the Irish patent box and potentially on its applicability.
Developing an Irish framework which follows the modified nexus approach will likely have limited tangible benefits for companies where significant R&D activity does not take place in Ireland (notwithstanding other significant substance, operations and employment).
As a result, we believe that the Department of Finance will be simultaneously focusing on enhancing our existing intellectual property tax offerings. This will be required in order to ensure that Ireland has a competitive offering for those companies who might not qualify for the knowledge development box regime, if based on a modified nexus approach.
Head of Tax
1 Stokes Place
St Stephen’s Green
t: 01 410 1000
f: 01 412 1122
d: 01 410 2027