2 November 2014

Ireland may have to rethink Knowledge Box strategy

Tax strategy seems to be the current reputational issue for Countries as tax authorities globally become more aggressive in attacking tax avoidance and transfer pricing schemes that they see as unethical and unfair.

However, Ireland has pinned its economy on being a low tax, business friendly economy with a low corporate tax rate of 12.5%. The only problem is multinational companies don't want to pay 12.5% and use transfer pricing and tax loopholes to lower this further.

The UK has a similar rate of tax which is lower than the Irish standard rate of 12.5% but is under significant international pressure to crack down on multinational tax avoidance by changing it's controversial "Patent Box" strategy.

British Chancellor, George Osborne signalled last week that the country is in the process of looking at the Patent Box mechanism of reducing corporate taxes in the UK to 10% (or below when Research and Development reclaims are taken into account), in order to make it more difficult/strict

This brings into question Ireland's plan of replacing the "double Irish" loophole, a scheme favoured by US tech giants, with the "knowledge box" which looks to copy the UK's patent box at a lower rate of 6.25%.

By closing this loophole Ireland is trying to restore international confidence in its corporate tax system, and in order to do this it must focus on creating a transparent and ethical corporate tax system. In light of international pressure on the UK system, it is possible that Ireland's "knowledge box" will be challenged by the European Commission.