‘Knowledge box’ tax rate likely to be 5%

The Government is likely to consider adopting a corporate tax rate of 5 per cent on its proposed knowledge development box, putting it on a par with the lowest rate in Europe, according to sources.

The Department of Finance has launched a 12-week consultation process on the scheme, which is designed to replace the controversial "Double Irish" mechanism.

The incentive will allow companies to avail of a special low rate of tax on earnings generated from intellectual property, provided they can prove the relevant research and development was conducted in the same jurisdiction.

Sources say department officials have already received strong feedback from companies and other interested parties that a low rate is essential to sell Ireland abroad.

The so-called Luxleaks revelations are also said to have changed the environment, switching the focus away from Ireland’s tax code and potentially giving the Government greater scope to adopt a more competitive rate.

Minister for Finance Michael Noonan says he wants to ensure the Irish scheme represents "a best in class offering" in order to enhance the State's competitiveness.

Currently the Netherlands has the lowest rate, of 5 per cent, followed by Luxembourg at 5.76 per cent, while Britain has a rate of 10 per cent, equivalent to half its headline corporate tax rate.

Announcing details of its consultation process, the Department of Finance insisted that a decision about the headline rate of tax would not be made until nearer the budget.

Department officials also said making the scheme less onerous to administer for government and firms – a common complaint in other jurisdictions – was a key objective.

However, they said the Irish regime would comply with the relevant OECD and EU requirements on income-based intellectual property regimes, which are due to be finalised in the third quarter of this year. The scheme is also likely to be tailored to the needs of frontline business sectors such as ICT, pharma and agribusiness.

The new OECD rules are expected to directly link the tax relief to the amount of research and development conducted in the jurisdiction, thereby aligning tax rights more closely with “substance”.

The OECD “substantial activity” requirement is designed to ensure that tax benefits arising under preferential regimes for intellectual property are directly related to real activity.

Significantly, the OECD’s approach permits states to provide their own preferential rate of corporate tax for IP income “so long as there is a direct proportionate nexus between the IP income and the R&D expenditure which generated that income”, the Government consultation document said.

The existing patent box regimes in the UK, Netherlands and Luxembourg are likely to have to be retrofitted to take account of the new rules.