Ireland Adopts First Mover Advantage Including Commitment to a Best-in-Class Knowledge Development Box – A Clear Roadmap for the Future
The prevalence of primarily US headquartered groups using non-Irish tax resident companies has caused an unnecessary focus on the underlying nature of the Irish tax system. In today's Irish Budget, the Minister for Finance outlined proposals to cause such companies to be regarded as Irish tax resident and liable to Irish tax at either a 12.5% rate on trading income or otherwise at 25%. To maintain Ireland's competitiveness, the Minister also announced an intention to introduce an OECD-compliant internationally tax attractive knowledge development box and other fiscally attractive initiatives.
For some years, leaders of the G20 group of economies have been focused on the international tax planning of multi-national groups. Various high profile international groups have been targeted, probably unfairly, for taking advantage of countries' differing tax laws to maximise the returns available to shareholders.
The cross-border political campaign has led to the establishment of the OECD Base Erosion and Profit Shifting ("BEPS") initiative which is seeking to develop an international framework for acceptable international tax norms. In one of its earlier reports, the OECD highlighted that the colloquially known Double Irish and Double Dutch structures, whilst lawful, were unacceptable. More recently, the EU Competition Commissioner has commenced various State Aid investigations to ascertain if any unfair advantage has been conferred on certain companies establishing within an EU State by reference to rulings given by Member States' tax authorities.
The colloquially known "Double Irish" is a structure that, in its simplest form, is driven by the interaction of the US and Irish tax codes. It enables profits from non-US intellectual property to be paid by an Irish tax resident corporate to an Irish incorporated but non-Irish tax resident ("INIR"). Under the US tax code, and subject to various constraints, the US applies a 35% tax rate when income is repatriated to the US but not whilst such income is located in an INIR. In Budget 2015 the Minister for Finance has introduced changes to the use of INIR's.
Finance Bill Proposals
It is proposed that the Finance Bill, when published, will contain provisions to;
- cause, with effect from 1 January 2015, any newly Irish incorporated companies to be regarded as Irish tax resident;
- provide a grandfathering of existing INIR's. The non-Irish tax residence will be capable of being maintained until 31 December 2020. Thereafter, the companies will become Irish tax resident;
- enable Irish research and development credits at 25% of eligible spend to be available from 1 January 2015 on actual rather than incremental spend;
- provide various incentives in relation to special assignment relief for foreign secondees into Ireland and other income tax incentives; and
- cause an enhanced ability to obtain tax amortisation on intellectual property, that is not limited to 80% of spend. Provision will also be made to amend the definition of eligible intellectual property expenditure to explicitly include customer lists.
Additionally, the Minister has announced a public consultation to introduce an OECD-compliant knowledge development box to take effect from 2016, or when the OECD BEPS initiative concludes in 2015. This should encourage intellectual property to become located in Ireland alongside EU R&D activity.
The proposals provide welcome certainty and demonstrate Ireland's clear desire to comply with the G20-endorsed new international tax environment. The grandfathering regime for INIR's provides an opportunity for groups to rearrange their affairs in a manner that takes into account the next BEPS report due in 2015 and Ireland's proposed new knowledge development box. Ireland's move in Budget 2014 in respect of Stateless Irish incorporated companies was an insufficient step in dealing with concerns about the international efficacy of the Irish tax regime; the proposed changes provide a clear indication of Ireland's desire to be fiscally best-in-class.
Given Ireland's desire to expand its double tax treaty network, it is likely that Irish incorporated companies that are effectively managed outside of Ireland within the terms of the appropriate double tax treaty will not be regarded as Irish tax resident (other than Stateless companies).
To preserve a short-term opportunity, Ireland could have waited to change its law in a manner that would not put it at a competitive disadvantage to other countries' tax regimes. It should be commended at G20 and OECD level for adopting a "first mover" approach to implementing BEPS whilst also encouraging dialogue on development of a knowledge development box that is best-in-class and not falling foul of any preferential taxation regime highlighted by OECD Action 5. In the interests of long-term certainty, the Minister's proposals are welcome and demonstrate the long-term investment proposition of Ireland Inc. and its commitment to its well established 12.5% corporate tax rate.
Ireland has taken a lead in adhering to one of Adam Smith's canons of taxation in giving a road map that Irish tax liabilities for international groups locating here will be clear and certain. For additional information on "A Road Map for Ireland's Tax Competitiveness", please click here.