Preliminary figures suggest that there has been a low take-up for Ireland’s recently introduced Knowledge Development Box (KDB) intellectual property investment incentive. However, this shouldn’t deter investors from applying for the new scheme.
Knowledge Development Box – The Basics
The Knowledge Development Box was introduced by Finance Act 2015 for companies whose accounting period commences on or after 1 January 2016, and has been described by the Irish Government as
best in class, offering a low, competitive, and sustainable tax rate.
The Knowledge Development Box relates to income that arises from patents, copyrighted software, and, for smaller companies, other intellectual property equivalent to a patentable invention. The regime is available to those companies carrying out the research and development as defined by Irish tax legislation.
Under the scheme, an eligible company is entitled to a deduction equal to 50% of its qualifying profits. Effectively, this reduces income tax on qualifying profits to 6.25%, given that Ireland's headline corporate tax rate is 12.5%. There is a time limit of 24 months from the end of the accounting period to which the election relates, for electing that the Knowledge Development Box treatment apply to a qualifying asset.
Up To International Standards
Importantly, the Knowledge Development Box is aligned with international tax standards, particularly the part of the OECD’s base erosion and profit shifting (BEPS) project dealing with “harmful” tax regimes. As such, it follows the OECD’s “modified nexus approach,” which is intended to ensure that a taxpayer benefits from preferential IP tax regimes only to the extent that associated expenditures, such as on R&D, that gave rise to the IP income took place in the same territory.
Furthermore, in line with good international practice, anti-avoidance provisions are built into the Knowledge Development Box legislation.
This means that the Knowledge Development Box should avoid scrutiny from the likes of the OECD and the European Union, or any international pressure for the regime to be amended or shut down.
Ahead Of The Competition
The Knowledge Development Box is up against stiff international competition, with “IP boxes” of a similar nature deployed by governments around the world, especially in Europe, including in Belgium, Italy, Luxembourg, the Netherlands and the United Kingdom. However, the Knowledge Development Box is one of the only IP boxes to offer an effective income tax rate substantially below 10%.
A Slow Start But Early Days?
In April 2018, Irish Finance Minister Paschal Donohoe told parliament that fewer than 10 taxpayers had claimed tax relief under the Knowledge Development Box scheme. But does this mean that the incentive is not as competitive as the Government hoped it would be? Not necessarily.
As Donohoe emphasised in his parliamentary answer, it is too early to tell how well the scheme is being received among investors, largely because of the long lead time involved in claiming the relief. He explained that as Knowledge Development Box relief is applicable for accounting periods ending on or after 1 January 2016, the first corporation tax returns in which relief could be claimed were due for filing by 23 September 2017. However, companies have up to two years in which to make their claim due to the “complex” nature of the scheme.
As such, more claims in respect of the year ended 31 December 2016, may be made by September 2018," he said.
We will have to wait until after next December when Knowledge Development Box figures are finalised to have a more accurate picture of the scheme’s take-up, Donohoe suggested.
It’s certainly far too early to write the scheme off as ineffective just yet.