Sunday 22 September 2019

The answer to Ireland's headline rate of 12.5pc corporate tax is the Knowledge Box rate of just 6.25pc

It's all change for Ireland in terms of intellectual property and corporate tax - and Dara Kelly examines how US multinationals are responding in a post-Double Irish world

US President Barack Obama has backed the move to reform BEPS guidelines
US President Barack Obama has backed the move to reform BEPS guidelines

Dara Kelly

One year after the announced closing off of the Double Irish tax arrangement, US multinationals once again turned their attention to Dublin as Ireland announced details of the Knowledge Development Box, or KDB.

This new component to its corporate tax regime will allow companies to pay a reduced corporate tax rate of just 6.25pc on qualifying revenue generated by patents and other related income.

This new rate is half the current 12.5pc headline corporate tax rate, one of the lowest in the developed world.

With the popular view that future profit in the global economy will be largely driven by patented technologies, countries have been busy structuring tax regimes around intellectual property, or IP, to stay competitive while ensuring a stable tax base and quality job growth within their borders.

Ireland is not the first nation to institute an IP-based tax break designed to attract and retain R&D in sectors such as technology, pharmaceuticals and life sciences. However, it will be the very first compliant with the OECD's base erosion and profit shifting (or BEPS) guidelines.

This means that Ireland's KDB and applicable tax rate is future-proofed while others such as the United Kingdom's Patent Box with its 10pc rate and the Netherlands' Innovation Box (currently 5pc) will have to be overhauled to fit BEPS parameters.

Some critics of Ireland's new corporate tax policy and the KDB say the strict adherence to the OECD's BEPS guidelines have significantly reduced the type of qualifying IP and thus the revenues that can come from the reduced corporate tax rate.

Fears persist that this will make Ireland a less attractive option for US multinationals. This is a misplaced concern.

While the new corporate tax policy is more diluted than originally anticipated, Ireland's KDB highlights the country's adaptability in a challenging international tax environment. It also compensates for changes in its tax legislation and demonstrates an ability to get ahead of the OECD's BEPS guidelines.

While Ireland needs to be competitive on tax, it doesn't need to be desperate. The Double Irish tax arrangement has been grandfathered for another five years.

With the new Irish tax regime now established, companies like Google, Yahoo, Intel and Pfizer have plenty of time to still enjoy the old rate (if they so choose), transition their tax strategy for 2021 and beyond, and engage whatever IP migration they deem necessary for the greatest tax efficiency going forward. These companies can plan their strategies in a country with a stable tax regime and in compliance with the OECD's BEPS guidelines. This type of certainty is critical as some of the world's largest corporations begin to prepare for the much stricter country-by-country reporting standards being aggressively enforced by the EU.

Ireland, as well as other countries, grants tax allowances based on the value of IP brought into its borders. These policies are generating intense interest from multinationals. Despite the time remaining for existing multinationals to utilise the Double Irish arrangement, they are busy making plans well before the arrangement actually expires.

Given the heightened scrutiny and unwanted attention these companies are receiving in relation to any our-shore corporate structures, US multinationals are looking for stable onshore jurisdictions in which to build out their operations.

We believe a great IP migration will begin in 2016, and Ireland is poised to reap much of the benefit.

Given the new global tax realities and mounting pressures to be more transparent, these multinationals are beginning to shift considerable IP assets. And with the KDB as a potentially attractive "add-on" benefit of the Irish tax regime's allowances, we anticipate an enormous amount of IP migration from offshore to onshore in the next several years.

Ireland's recent budget announcements, including that of its continued commitment to their corporate tax rate of 12.5pc, met with some criticism from quarters outside of Ireland. One such critic claimed that Ireland was a "pariah state," though unsurprisingly his priorities are tethered to another EU state's interests.

The reality is that Ireland is a good place to do business. Recently Facebook was granted approval to build a €200m data center in County Meath, and Pfizer announced the creation of another 130 jobs across its three manufacturing sites in the country.

Ireland has a stable and competitive tax regime. Together with its infrastructure and quality human capital, that makes it a top destination for US companies to locate.

This is endorsed by evidence that the output from US companies resident in Ireland now exceeds $80bn a year and exports from such firms are four times higher than from China.

And further demonstrating the country's attraction for American companies beyond the tax regime, in Grant Thornton's latest Global Dynamism Index (GDI), Ireland moved into the top 20 global ranking for the first time. This was driven by its Eurozone-leading business-operating environment and human capital.

Ireland is young (with a median population age of 35, the lowest in the EU), highly educated, English speaking and part of the Eurozone. These are unique and compelling attributes.

When you combine these factors, the strength of Ireland's reputation becomes apparent and a key reason why so many large multinationals will continue to invest and move their valuable intellectual property to Ireland from offshore locations in the near future.

Dara Kelly is leader of the US Irish Business Group at Grant Thornton LLP in New York. This article first ran in 'Accounting Today' in the United States on November 4

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