Insight from Joan O'Connor, Partner, Deloitte on Budget 2015.
In a largely positive announcement for companies, the Minister provided for a broad range of measures in order to enhance Ireland’s competitiveness with a focus on existing IP operations located here and attracting new IP-based corporates. While the measures introduced provide a realistic alternative to the Double Irish regime (discussed below) they are attractive for the Irish plcs, US and non-US multinationals in considering Ireland as a location for IP-based operations. The key measures announced as part of Budget 2015 include:
• Introduction of a Knowledge Development Box in Finance Act 2016 or earlier if the outcome of an EU / OECD review is known
• Enhancement of the current R&D regime in Ireland, with the abolishment of the base year expenditure threshold, which will allow companies to achieve larger tax credit benefits starting from 1 January 2015
• Significant enhancement to the current onshore IP regime in Ireland with the removal of the minimum corporate tax payable and widening of the definition of IP
• The Double Irish structure will no longer be available to multinationals (predominantly used by US multinationals) establishing such structures from 1 January 2015. A grandfathering period of six years up to 31 December 2020 has been included for Double Irish structures in place on or before 31 December 2014
• Enhancement of existing Special Assignee Relief Program (SARP) to attract senior executives to Ireland.
Irish and overseas multinational companies who are looking to develop and exploit IP going forward are going to be affected by these measures.
The Minister also announced a new “Knowledge Development Box” regime. A consultative process has been announced to develop a best in class regime similar to IP / Patent Box regimes in existence elsewhere in Europe. Several IP regimes are currently the subject of a review under the EU’s Business Code of Conduct Group, the outcome of which is expected by the end of 2014. This new Knowledge Development Box regime will aim to complement the existing onshore regime, attract new inward investment and have a low and sustainable tax rate aligned with our competitors.
The onshore regime provides for amortisation on an accounts basis of defined IP acquired, which to date gives a minimum effective tax rate of 2.5% on taxable profits. The onshore regime is not subject to the EU Code of Conduct review currently being undertaken in respect of IP / Patent Boxes in Europe, as it as a tax depreciation relief. Effective 1 January 2015, the current onshore regime will remove the minimum level of corporate tax and widen the definition of IP. The announcement of the improvements to the existing onshore IP regime, particularly the removal of the minimum corporate tax level and the widening the definition of IP is a welcome enhancement of the current onshore regime which means that subject to meeting the relevant criteria, corporate tax could be very low.
The removal of the base year expenditure from the R&D tax credit regime further enhances Ireland’s excellent reputation for the exploitation and development of IP. This, in addition to the enhancement to the onshore IP regime, increases the competitiveness of Ireland’s onshore IP offerings and will allow companies to realise greater cash tax benefits.
With effect from 1 January 2015, no new structures will be in a position to avail of the Double Irish regime. A grandfathering period of six years has been announced for structures in existence as at 31 December 2014.
The enhancement of the existing Special Assignee Relief Program (SARP) is also a welcome move, particularly at a time where the focus of the OECD’s BEPS project is aligning substance with taxing rights and key people functions.
In summary, our view is that this is a positive announcement on Irish tax policy and the measures announced seek to enhance Ireland’s intellectual property regime and underpin the Government’s commitment to international investors. The announcement addresses the international reputational concerns arising from the intense focus of the Double Irish structure, while simultaneously reaffirming the Government’s international commitment to the 12.5% corporate tax rate and towards providing a competitive tax environment for multinationals to operate in Ireland.
The changes to the onshore IP regime and the R&D tax credit regimes provide an opportunity for companies to maximise the cash tax benefits relating to same. The regimes are not subject to any ongoing reviews by the EU Code of Conduct group.
With the introduction of the new Knowledge Development Box, expected to be introduced in 2016, there will be scope for companies to further maximise their IP operations in Ireland on an income basis. The details remain to be seen, but this step should provide a credible alternative to the Double Irish going forward.
All in all, a fair day’s work by the Minister and his colleagues.