KPMG’s tax practice has responded to the draft proposals around the design of the KDB and how it might best complement the existing R&D tax credit.
Ken Hardy, R&D Incentives tax partner, said, “While the Minister is hoping to develop a best in class offering, the OECD has placed real constraints and limitations on what is possible. To be compliant with the proposed international agreements on IP regimes, the KDB will need to follow what is known as the Modified Nexus approach i.e. that any tax benefits would be directly related to the level of R&D being conducted in the host country.
“At its core the KDB is the ability of a company to reduce its tax liability on profits related to income generated from technology innovation and Intellectual Property – subject to strict criteria.“
Ireland is currently behind the curve in the area of tax incentives for innovation. For example the UK Patent-Box regime offers a 10 percent corporate tax rate on profits flowing from patented or unique inventions. This rate on innovations brings the UK’s corporate tax rate for businesses developing new products below Ireland’s flat rate of 12.5 percent. The UK scheme follows similar systems set up in the Netherlands, Belgium and Luxembourg, amongst others.
“We need to grasp this opportunity to ensure that what we put in place in Ireland is indeed “best in class”, but is also beneficial to the type of companies operating here in Ireland, “ said Damien Flanagan, tax director KPMG.
“The scale is different here in Ireland. We have a sizeable SME sector from university spin-outs to indigenous businesses doing good R&D work while demonstrating a commitment to innovation over the years.
“In addition to the proposed KDB, companies who conduct R&D can avail of the R&D tax credit. According to the Department of Finance, in 2012, over 1,500 companies claimed the R&D tax credit.. These companies should have the KDB offering firmly on their radar. The KDB should be another tool in their armoury to encourage and reward them for investment in innovation,” said Flanagan.
Regarding KPMG’s recommendations Hardy stated “We made several suggestions for improvements to the draft recommendations, driven by our overarching desire for Ireland’s KDB to be the most competitive it can be in the circumstances.”
“In our submission we asked the Department of Finance for IP qualifying assets to be as broadly defined as possible,” said Flanagan. “We would encourage the Department to engage with legal experts regarding all forms of legal protection. Some companies don’t protect their IP by way of patent or copyright for lots of good commercial reasons, yet this should not prevent them from coming within the parameters of the KDB.”
Hardy added, “Similarly, regarding the definition of qualifying expenditure, we have recommended that the definition should be broader than the current definition outlined in the Draft. We feel it’s overly restrictive and would limit our KDB’s “best in class” aspiration. We would like to see a more appropriate definition to take into consideration items such as what overheads were incurred and what materials are used.
With qualifying income, i.e. the types of income that can benefit from KDB the Draft proposals include broad categories like royalties, licensees and sales revenues. But, we feel it could think more laterally to also include fee income and rents.”
Flanagan noted, “Under the draft proposals the tax payers will be obliged to ‘track and trace’ and provide documentary evidence, and that is as it should be. However, larger and more sophisticated organisations can track and trace in a more sophisticated way than SME’s, The KDB will be very important to our SME sector and we recommend that the regulations build upon the information recorded under the diverse range of record keeping and cost control processes already in place for the R&D tax credit and thereby avoid unnecessary duplication of effort.
Additionally, we suggest that for SMEs, relief might be available on all profits from an active business in the case of companies which meet, year on year, a ‘de minimis’ level of spend on R&D activities which are eligible for the R&D tax credit. The potential synergies between the R&D tax credit and the KDB are obvious, particularly for SMEs.
The Government has one shot at getting the KDB right and as Hardy commented, “Our submission is keenly focussed on ensuring that the proposed KDB regime encourages continued investment in Ireland by multinational and domestic companies in innovative activities and assets.
Our intention at KPMG is to make suggestions that if adopted, will ensure Ireland’s Knowledge Development Box is truly fit for purpose.”
The dominant issue in the Irish Research, Development and Innovation landscape is the Government’s soon to be finalised Knowledge Develop Box (KDB).
Denis Hayes, MD of IRDG a leading representative group for industry and academics involved in RD&I, is concerned that the KDB will be narrower in scope than its members would have liked.
“What qualifies as IP should be broader than just patents and copyright, as per the current draft proposal. A lot of the R&D generated by our members is not patented because not all industry uses patenting as a means to protect.”
It’s a view echoed by Damien Flanagan, tax director, KPMG, “We would like to see IP qualifying assets to be as broadly defined as possible. Some companies don’t protect their IP by way of patent or copyright for lots of good commercial reasons, yet this should not prevent them from coming within the parameters of the KDB.”
KPMG feels that the definition of qualifying expenditure is also overly restrictive and instead would like to see it take into consideration overheads incurred and materials used. With qualifying income, apart from broad categories like royalties, licensees and sales revenues, they would like to see more lateral thinking applied to include fee income and rents.
Derek Henry, BDO’s R&D tax partner would like to see the way in which the credits are recognised reviewed. “Currently companies can recognise the 25 percent credit “above the lines” i.e. in pre-tax profits, in their accounts with a 12.5 percent normal corporation tax deduction being recognised through the tax line. The legislation could be amended so the full 37.5 percent value could be recognised above the line in a manner that would be cost neutral to the exchequer.
This would be beneficial to Irish companies who are in a multinational group where decisions are made based on the company’s profits before tax.
While suggestions for improvements abound, all will be revealed in Budget 2016.