With public consultation complete, the government’s new Knowledge Development Box (KDB) is expected to be available early next year.
Its aim is to make Ireland a more attractive location for the development of intangible assets and to continue to be an attractive base for foreign direct investment (FDI).
IP Boxes have shown they can increase the attractiveness of a country as a location for intellectual property. While Minister for Finance Michael Noonan has committed to Ireland’s KDB being best in class, he needs to bring clarity to this commitment.
Paddy Stapleton, senior tax manager at Baker Tilly Ryan Glennon, said: “What’s needed is a well-written piece of legislation that can be clearly interpreted.”
Orla Gavin, partner at KPMG, said: “It will be essential that the definition of qualifying assets is crafted in such a way that it captures a broad base of assets to reflect the diverse range of innovative activity occurring in Ireland. For example, it should be wider than just patents, and should embrace software which is typically protected by copyright.
Views differ regarding the most appropriate tax rate for IP, Stapleton said. “Rates of other regimes vary from 5 to 10 per cent, but because the Netherlands is a direct competitor as an FDI location, and it operates a 5 per cent rate, we believe the Irish KDB rate must also operate at 5 per cent in order to be competitive internationally,” he said.
Stapleton hopes the KDB will avoid restrictions on related party expenditure, which in his view would limit its impact for both large MNCs and small indigenous niche developers.
“Many Irish companies outsource specialist R&D functions to overseas affiliates, or may carry out a portion of its R&D activity through an overseas branch.
“Where an Irish operation bears the economic risk of development and has ownership of the relevant IP, profits from such development should come within the KDB.
“This should be carefully considered in designing the model. It should be possible to achieve this without compromising the ‘substantial activity’ requirement.”
Dr Christina Gates, managing partner at Tomkins, said that one of the most important things was for the KDB to stipulate that patents should be searched and examined.
“In other words, we need to ensure that it’s a real invention,” she said. “Something that didn’t happen in the past.
“We can also learn from the experience of others. Britain’s Patent Box didn’t require that an invention be developed or finessed in Britain to qualify for tax relief.
“With our KDB, we should insist that any qualifying IP should be created or substantially created in Ireland. That’s very important if we are to promote R&D for SMEs, and if we are to build high skilled jobs here.”
As the largest tax practice in Ireland, KPMG advises many of the multinationals locating to these shores – together with many innovative indigenous SMEs – giving the firm a broad perspective on IP issues.
“In today’s knowledge economy, IP can be a critical part of the tax strategy of many businesses,” said Adrian Crawford, who heads up Ireland’s Tax Centre of Excellence at KPMG New York.“We have a dedicated IP specialist team which includes experts in international tax, transfer pricing and valuations, supply chain management, R&D tax credits and accounting for IP.”
Crawford and his colleagues, Orla Gavin and Anna Scally, who spend time visiting companies in the US West Coast Bay area each month, are part of KPMG ’s specialist team advising clients on IP strategies, with a particular focus on highlighting Ireland as a location for IP investment.
Gavin said: “Changes to the international tax landscape will mean a significant shift in the location of globally mobile intangible assets in the short to medium term, and Ireland will need to compete to attract this investment.
“We advise those who may be considering restructuring to plan and assess options early. The location of IP, and the strategy around its development and exploitation, are critical value drivers for many businesses and should be given early and considered analysis.”
Crawford said: “We are seeing a lot of interest in Ireland as a location of choice for future IP investment and development, and are working with companies to assess and model the financial and commercial impact of on-shoring IP to Ireland. In many cases, Ireland offers a strong proposition when compared to other jurisdictions.“
However, there is increasing emphasis on the alignment of R&D substance, ie, highly qualified senior people, with economic ownership of IP. This will become critical from a transfer pricing perspective. Ireland’s challenge is how to attract and retain individuals with the requisite skill sets, given our high personal tax rates.
”The proposed Knowledge Development Box (KDB) is a topical issue for companies who are looking at Ireland as a location for IP investment, and this includes and Irish SMEs.
KPMG ’s submission on the KDB included an extensive list of recommendations on the regime design, having consulted widely with Irish business of all sizes and multinationals operating in Ireland.
Crawford said: “There are a number of design issues critical to the effectiveness of the KDB as a competitive tax offering for Ireland.
“It will be essential that the definition of qualifying intangible assets is as broad as possible, to reflect the diverse range of innovation being undertaken in Ireland, and is not just restricted to patents.
“The modified nexus approach being suggested for box regimes internationally, which broadly restricts qualifying income by reference to locally performed R&D, is problematic for multinational companies in Ireland.
“This is because Ireland is a small country which, by definition, has inherent limitations on the amount of R&D which can be performed locally.”
Crawford noted that even if the KDB is limited in application, Ireland’s overall tax regime continues to provide a competitive tax offering relative to other jurisdictions. In addition, the government has committed to examine ways in which Ireland can ensure that our corporate tax regime remains competitive.
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