by Aisling Donohue
The Irish government today published Finance Bill 2015, which gives effect to tax measures previously announced in the government’s budget, including the knowledge development box (“KDB”) tax incentive and country-by-country reporting. The bill also makes changes to the tax treatment of Additional Tier 1 instruments and adopts new antiavoidacne rules.
The bill fleshes out the KDB, which was first announced in 2014. The KDB aims to be the first BEPS-compliant intellectual property regime introduced, and it looks like Ireland has achieved this aim.
The UK also launched its consultation document in relation to proposed changes to their patent income regime today. The Irish regime is narrower than the proposed UK regime in two regards, as discussed below.
The tax rate of the Irish KDB regime is 6.25 percent, created by allowing an imputed deduction equal to half of the income which qualifies for the regime. In accordance with the final report under action 5 of the OECD/G20 base erosion profit shifting (BEPS) plan, detailed records need to be kept to track the expenditure and qualifying income, with bifurcation as necessary. Once the regime is elected for an asset the asset stays within the regime and creates a notional separate trade.
Loss rules are amended to ensure that losses incurred on expenditure within the regime are only set off against other profits on a value basis. It would require 200 of loss on qualifying activities to offset 100 of profits on non-qualifying activities.
The classes of intellectual property to which the KDB will apply are broadly restricted to patents granted after substantive examination for novelty, with some transitional provisions. In addition, certain medical products and plant breeders’ rights protected by EU law are included, along with computer programs within the meaning of the Copyright and Related Rights Act 2000.
That Act defines a computer program as “a program which is original in that it is the author’s own intellectual creation and includes any design materials used for the preparation of the program.” If a computer program is an adaption or derivation of an existing work, the program must be bifurcated into qualifying and non-qualifying for the purposes of the relief.
Marketing-related intellectual property is expressly excluded from the regime.
The regime allows for families of qualifying assets to be treated as one if to bifurcate them would be excessively onerous due to shared expenditure and technology.
Qualifying expenditure includes expenditure incurred by the company, or outsourced to non-group companies, but excludes expenditure outsourced to group companies, interest and financing costs, acquisition costs, and any costs which do not meet an arm’s length test.
Unlike the UK regime, the Irish regime excludes any expenditure incurred by the company if a tax deduction was given in another state in respect of that expenditure. So, for example, if an Irish company incurred research and development expenditure in a UK branch and that branch claimed a deduction for costs against the taxable profits in the UK, those costs could not qualify for relief in Ireland. Such costs would qualify under the proposed UK regime.
Ireland appears to have gone further than BEPS requires in this regard, and it is arguable that this restriction is in breach of EU law.
The formula is unsurprising and BEPS-compliant. Where non-qualifying expenditure including acquisition costs and connected party expenditure exceed 30 percent of the qualifying expenditure, then 30 percent is applied as up-lift expenditure. Where such costs are below the 30 percent threshold, the non-qualifying expenditure itself in included.
In addition, Ireland’s KDB makes the formulary apportionment compulsory. In contrast, the UK proposes to make the formulary apportionment a rebuttable presumption to allow for exceptional cases where an alternative method may be BEPS-compliant.
Ireland is proposing a simplified and extended regime for small and medium sized companies, i.e. those where the company’s qualifying income is less than €7.5 million and the group’s turnover is less than €50 million.
Since the EU-wide SME turnover threshold for the group block exemption regulations is €43 million, it is likely that this turnover threshold will need to be reduced, or the simplified regime notified to the EU authorities for prior approval.
The SME regime proposes that a fair and reasonable basis be used for allocating costs and income to intangibles. The class of assets qualifying is extended to include all intellectual property resulting from inventions that are certified by the Controller of Patents, Designs, and Trade Marks as being novel, non-obvious, and useful. If approved, this could significantly extend the regime in relation to SMEs.
The regime appears to co-exist with existing Irish reliefs in relation to the amortization of acquired intellectual property and the existing R&D credit regime. Refundable tax credits under the R&D rules are calculated as though the KDB rules did not apply.
Country-by-Country reporting
Ireland has largely adopted OECD BEPS action 13, rather than seeking to rewrite the provisions in primary legislation.
The provision appears to allow the Revenue Commissioners, via secondary legislation, to increase reporting obligations under this provision. This approach is decidedly problematic as a matter of Irish law in relation to cases other than where the ultimate parent entity is an Irish company.
The Irish Supreme Court has cast significant doubt on the constitutionality of much secondary legislation in Ireland. As country-by-country reporting creates obligations rather than reliefs for taxpayers, any secondary legislation could be vulnerable to a challenge.
Unlike Ireland, the UK has published draft legislation and is seeking consultation on their proposed implementation of BEPS action 13
One notable difference from the UK discussion draft on country-by-country reporting is the level of penalty for non-compliance. While the UK is proposing to levy an up-front penalty of £300 and a daily penalty of £60 for a failure to comply with the rules, Ireland is proposing an up front penalty of €19,045 and a daily penalty of €2,535, in line with penalties under Ireland’s implementation of the Savings Tax Directive. The Irish rules apply equally to a failure to file the report as they do to filing an inaccurate report.
Whether these rules will be enforceable at all remains to be seen. This looks like rushed legislation which may or may not be effective and, as a result, significant changes at the Committee stage of the bill might be expected if this provision is to result in a substantive adoption of BEPS action point 13.
Travel expenses of non-resident non-executive directors
New rules also provide that any vouched travel and subsistence paid by an Irish company to a non-resident, non-executive, director can be paid tax free.
Banking capital requirements regulation
The bill includes provision to deal with Additional Tier 1 instruments issued in accordance with Article 52 of the Capital Requirements Regulation, ensuring that such instruments will be treated as debt for tax purposes with associated costs being deductible.
The quoted Eurobond exemption from withholding tax is extended to such instruments. Antiavoidance rules ensure that the relief only applies to genuine Additional Tier 1 instruments and not to instruments issued which form part of a scheme or arrangement which has a tax avoidance purpose. This ensures that Irish banks raising capital via such instruments are not treated as raising additional equity on which the payments would be treated as non-deductible dividends.
Antiabuse rules
The bill contains a number of specific antiabuse provisions in keeping with recent Finance Acts. On the avoidance side, a number of measures prevent the tax-free disposal of assets.
On the evasion side, Revenue is given significant additional powers to gather data from third parties, to revoke VAT registration number, and publish such revocation where they feel the VAT registration was abusive.
Rules to incentivize payments by card rather than cash should increase pressure on the black economy, along with changes to certain VAT collection rules.
— Aisling Donohue is a tax partner with mgpartners in Dublin. She has advised on corporation tax matters for over fifteen years, with a particular interest in international and EU tax law.
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