Finance Bill shows signs of scrutiny of corporate tax regime

The key corporate tax measures in the Finance Bill show clear signs of the international scrutiny now surrounding multinational tax.

The main new measure, the knowledge development box offering a lower tax rate on profits earned as a result of research and development, has been strictly drawn up to comply with OECD guidelines. The Bill also contains new laws on tax reporting by multinationals.

Plans for the new knowledge development box were first announced a year ago, in Budget 2015, when Minister for Finance Michael Noonan announced the abolition of the controversial double-Irish tax relief.

The Knowledge Development Box was seen as a move to provide a new attraction for foreign direct investment to locate here, with the double Irish no longer available for new entrants to Ireland. However the final shape of the new tax box, announced in the Bill, show it will have limited relevance to the big multinationals here.

Useful addition

“It will be a useful addition to Ireland’s armoury in attracting foreign investment but a lot less significantly than envisaged a year ago when it was announced,” said Feargal O’Rourke, managing partner at PwC.

He said it was likely to be more relevant to major Irish companies, who tend to conduct their research and development in Ireland and would thus stand to benefit more significantly.

The knowledge development box offers a special 6.25 per cent tax rate on profits emerging from research and development.It will run for an initial period of 2016-2020 and is likely then to be reviewed. The Government will hope it will be a long-term incentive.

While originally it had been thought it might allow major US multinationals to benefit by moving intellectual property rights – relating to research conducted elsewhere – to Irish subsidiaries, the rules as set down in the bill show this will not be generally possible.

Under OECD guidelines for such arrangements, the relief is freely available only on profits that result from research conducted in the country itself.

The major US multinationals with subsidiaries in Ireland typically conduct much of their research in the US, and so the relief will be of limited relevance to them, although it may encourage some to spend more on research in Ireland. If even some of the relevant research is conducted here, a proportion of the resulting profits can benefit from the special tax rate.

An allowance, known as an “uplift”, will be possible, which will allow companies to get some relief on research conducted elsewhere and commercialised from an Irish subsidiary, subject to OECD guidelines.

The new knowledge development box is likely to offer more significant advantages to the big Irish companies with significant research budgets, such as the big agrifood firms, who would conduct much of their R&D in Ireland. Over time this could allow them to pay the 6.25 per cent rate on a portion of their profits, half the normal 12.5 per cent rate.

Financial results

The bill also contains new measures which will oblige multinationals resident in Ireland to provide country-by-country financial results to the Revenue Commissioners.

This is based on new OECD guidelines under the so-called Base Erosion and Profit Sharing initiative designed to monitor the way big companies shift around profits to try to minimise their tax bill.

Details will be filed in the company’s home jurisdiction and shared with revenue authorities in all the countries in which they operate. This means, for example, the Irish Revenue will have a more complete picture of the activities of US multinationals with Irish subsidiaries.

“This is just one example of tax law being tidied up throughout the Bill to ensure full compliance with OECD and EU obligations,” according to Brian Keegan, head of tax at Chartered Accountants Ireland.

“This is possibly indicative of the international scrutiny to which the country is constantly subjected. It won’t be enough to deflect the criticisms, but then it seems nothing we do would be enough.”

Ireland’s tax regime is likely to face fresh scrutiny in the weeks ahead when the EU Commission issues a final ruling on tax arrangements between the Revenue and Apple, widely expected to rule that they involved an illegal State aid.