Irish budget changes: some implications for MNEs

by Professor James Stewart

Ireland’s budget released today introduces two changes that have implications for MNEs, namely, a knowledge development box (KDB) and a requirement for country-by-country reporting.

The KDB, first announced in 2014, was seen as a partial replacement for the ‘double Irish.’  The ‘double Irish’ ended for new firms this year, but will not end for existing firms until 2020. This means that this latter group of firms may derive tax benefits from both the ‘double Irish’ and the proposed KDB.

The proposed KDB envisages a tax rate on IP income of 6.25 percent. A key aspect is the design, in particular the definition of the tax base. These details will be published in a forthcoming Finance Bill. All that has been stated so far in the budget pronouncements is that the proposed regime will be “OECD-compliant.”

The OECD envisages that qualifying assets will consist of patents and assets that are functionally equivalent to patents, such as copyrighted software. This latter aspect is of key significance to MNE investment in Ireland. It is understood that these qualifying assets must be developed in Ireland, but greater detail will be available in the Finance Bill.

The KDB will complement the existing IP write-off provisions. These enable a company to write off the cost of buying intelectual property over 15 years. The maximum write off allowed annually is up to 80 percent of annual profits, giving an effective rate of just 2.5 percent against income from the IP. The second quarter 2015 National Accounts saw a major purchase of IP by an Irish resident company (possibly Microsoft) to benefit from these provisions.

The overall OECD approach is that taxation of profits should be aligned with the “substantial activities that generated them” and that those profits arose from these activities and related expenditures. This is described as the “nexus approach” by the OECD, which also recognises that establishing a “nexus” between multiple strands of income and expenditure is complex.

The KDB may trigger organisational and new tax strategies by MNEs in Ireland. For example, a group may move IP development operations to Ireland to ensure that revenues flowing into Ireland would not be construed as BEPS. This may have the same effect as the “double Irish,” resulting in low or zero tax rates in Ireland; however, as stated by the OECD in Action 11, paragraph 56, “no or low taxation is not per se a cause of BEPS. Such actions, together with the purchase of existing IP could make Ireland’s tax regime even more attractive to MNEs with existing Irish operations.

The other main change announced is the introduction of country-by-country reporting as recommended by the OECD. This will affect large Irish firms and MNEs that have moved their domicile to Ireland, for example Covidian and Forest Laboratories.

US firms that have recently inverted to Ireland are unlikely to consider a subsequent move, as other countries have also introduced disclosure rules.  In any case, the level of disclosure (nine items) although on a country-by-country basis, is far less than that required for most purely domestic firms. The requirement to disclose to public authorities and not require public disclosure, is also likely to reduce substantially any adverse effects of disclosure

The basic premise of the EU in tacking tax avoidance and evasion is broader than that of the OECD. The EU emphasizes “fair burden sharing amongst taxpayers,” fair competition between business, and “fair play” in collecting taxes. Hence it is likely that further changes to the Irish corporate tax regime will follow from EU actions, for example following from the Apple case, the automatic exchange of information on tax rulings, and possible disclosure of corporate tax information.

For documents related to the budget, see:

• Financial Statement 

• Summary of Budget 2016 Taxation Measures – Policy Changes

• Taxation Annex to the Summary of 2016 Budget Measures

• Economic and Fiscal Outlook 2016

• Endorsement letter from the Irish Fiscal Advisory Council

• Budget 2016 – full document

• Economic Developments and Outlook for Ireland – presentation