The proposed KDB is in line with the commitment contained in the Road Map for Ireland’s Tax Competitiveness, which was published in October 2014 alongside the Irish Government’s Budget for 2015. It was noted in the document that the global economy is evolving and business assets resulting from investment in “knowledge-based capital”, such as intellectual property, are becoming a significant driver of economic growth in OECD economies.
The KDB will be based in part on similar patent box measures that have existed for many years in countries that compete with Ireland for FDI. It will provide an effective tax rate for intellectual property income that is below the normal 12.5% headline rate of corporation tax with the aim of encouraging companies to locate high-value jobs associated with the development of intellectual property in Ireland.
In his Budget 2015 speech, Minister for Finance Michael Noonan announced that “the Knowledge Development Box will be best in class and at a low competitive and sustainable tax rate.”
The KDB Consultation
On January 15, 2015, the Department of Finance released a public consultation paper which sought views on a number of design elements associated with the proposed new regime. These included the definitions of IP income, qualifying expenditure, and on how the KDB could interact with the research and development tax credit, capital allowances for intangible assets, double taxation relief provisions, and loss relief legislation. The consultation period concluded on April 8, 2015. It remains unclear however, when the Irish Government intends to publish draft legislation for the KDB.
Compatibility With International Tax Rules
As the consultation document points out, the Organisation for Economic Cooperation and Development discussions on base erosion and profit shifting, and also negotiations at European Union level, are striving for a clearer link to be established between the tax benefits arising under IP regimes and the amount of research and development expenditure incurred in that territory by companies in developing eligible IP.
On February 6, 2015, the OECD announced that countries have reached an agreement on using the modified nexus approach to special IP income tax regimes. The agreement follows proposals put forward during discussions between Germany and the United Kingdom, that a taxpayer would only be allowed to benefit from an IP regime to the extent that they can show that they incurred expenditures, such as on research and development, that gave rise to IP income in that territory.
According to Minister Noonan, Ireland’s KDB will comply with these international standards, which are expected to be finalised by the end of this year. However, it remains to be seen how compatible the new regime will be with these standards when detailed proposals eventually emerge, and the possibility that Ireland will be compelled by the OECD and the EU to alter the KDB in some way cannot be ruled out.