17 October 2014

Ireland developing "Knowledge Box" at 6.25% vs UK 10% rate

Thankfully, Ireland is abolishing the "double Irish" tax loophole, which incredibly, let multinationals lower effective tax rates to below 2%. With that in mind Ireland is starting a consultation project to develop its own version of the UK's "Patent Box" tax incentive called the "knowledge box" in an effort to stem any long term damage caused by the loss of the double Irish.

How the patent box works at present in the UK, is a company would be based in the UK, and would receive patent royalties (from qualifying patents) from connected companies or subsidiaries based in other jurisdictions or across the EU, in order build profits in the UK.
  • Revenue streams must be identified by isolating cash-flows from qualifying patents 
  • The patents must have been granted by an approved body e.g. UK intellectual property office, EU Patent Office, and dedicated EU countries (currently US/France and Spanish patents are excluded in the UK System).
  • Profits related to the qualifying income are calculated and a formula is used to work out an effective tax rate of approx 10% (depending on a number of variables listed on wikipedia here).
Patent box calculation example - Source:HMRC (link below)

The patent box helps to keep profits in the UK, and encourages R&D and investment in the UK, and the patent box doesn't require the multinational to send dividends to Bermuda or other tax havens.

Its possible that the "knowledge box" tax rate proposed by Ireland is just too low.

At just above 6%, and possibly open to manipulation with advanced transfer pricing and internal allocations, potentially a light touch by Irish Revenue (to avoid killing the golden goose), could lead to more of the same issues the OECD is attempting to tackle with the digital economy (reallocation of profits related to multiple countries, to one low tax country).

However, this may be too low a tax rate for Brussels, or the OECD to stomach.

On the plus side, at least the tax rate is marginally higher than the ridiculous rates paid under the double Irish, and the money stays in Europe and R&D is encouraged in Europe.

Ireland is currently under pressure from Europe, in relation to alleged "illegal state subsidies" given to Apple when Apple incorporated in Ireland in 1980, allegations which Ireland has denied and it was in in response to this growing pressure, Ireland pre-empted any court proceedings by electing to abolish the double Irish from January 2015 (however current multi-nationals using the system, can continue to use it until 2020).

The "knowledge box" will be rolled out in addition to the R&D tax credit currently available in Ireland that lets 25% of total qualifying R&D expenditure performed in Ireland be refunded or offset against corporation tax. This credit is not widely used at present, perhaps due to the cost of development in Ireland vs other high tech jurisdictions.

Details of the "knowledge box" is expected to be announced in the Finance Act 2015.

More details on the patent box on HMRC website here.