Tax experts and Ibec sound warnings over Knowledge Box
The model proposed for the Knowledge Development Box (KDB) may end up being too narrow to encourage companies to take part in Research & Development (R&D), business chiefs and tax specialists have warned.
And restrictions on the outsourcing of R&D may disadvantage smaller countries, according to submissions from both business body Ibec and accountancy giant Deloitte.
The proposed scheme, also known as a patent box, was announced in the Budget and is due to come into force next year.
The KDB will provide for a lower rate of corporation tax to income arising from intellectual property (IP).
However, brands would be excluded as stipulated by the Organisation for Economic Co-operation and Development (OECD), which is examining existing schemes elsewhere and developing new global rules for the tax break.
A separate submission to the Department of Finance from chartered accountants suggests the Government should consider allowing up to half of all profit derived as a result of qualifying R&D activities to be exempt from corporation tax under the proposed new regime.
By contrast, Deloitte said a rate of 2.5pc should be considered - approximately a fifth of the headline 12.5pc corporation tax rate.
Public consultation on the KDB ended yesterday with the Department of Finance now set to examine the submissions received from interest groups.
One of the key stipulations of the OECD is that IP has to be generated in the jurisdiction where the tax rate will be applied.
Therefore, if a company wants to avail of a preferential rate offered under the KDB, the R&D required to come up with the IP would have to be generated in Ireland.
There are concerns that the so-called modified nexus approach - which links the tax benefits arising from IP regimes to the amount of R&D spending that is incurred by companies - may be too restrictive.
"In particular, it is our belief that the regime as currently stated is too narrow to sufficiently encourage a broad swath of sectors to engage in R&D or innovation," Ibec said in its submission.
"The modified nexus approach would severely limit the use of the KDB for most, if not all firms by not aligning very well with the reality of IP protection and management in companies in general.
"An additional major concern is that restrictions on the outsourcing of R&D mean that smaller countries with limited skills pools in specialist areas will be disadvantaged by the new regime compared to larger countries."
Deloitte expressed a similar view in its submission.
"In order to level the playing field it is important that certain adjustments are made to the formula such as allowing some kind of depreciation of acquired IP such that income can be allocated in a fairer manner to Irish activity over time," Deloitte warned.
"This would provide a reasonable mechanism for ensuring that the income qualifying for tax benefits under a preferential regime has a direct nexus to the underlying expenditure which is the over-arching objective the OECD is seeking to achieve in its BEPS project in the context of preferential IP regimes."
The Consultative Committee of Accountancy Bodies Ireland proposed that the Government should consider phasing in the KDB. It also suggested that to broaden its scope, the equal treatment should be given to outsourced expenditure.
By way of example, the accountancy body argued that if an Irish company operates an R&D centre abroad, any R&D activity done inside the centre should fall within the KDB regime.