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Bearing in mind that the final paper on the OECD’s Base Erosion and Profit Shifting (BEPS) project was published in October 2015, it is unsurprising that the measures announced have a strong focus on BEPS compliance. The Minister for Finance believes that Ireland is well positioned for the post BEPS world.
The “Update on Ireland’s International Tax Strategy” was published as part of the Budget documents and reaffirms the Irish government’s commitment to the 12.5% corporation tax rate. Ireland’s corporation tax rate will be unaffected by the BEPs project.
The following measures are most noteworthy from an international tax perspective:
Knowledge Development Box (‘KDB’)
The KDB regime will come into effect from 1 January 2016 and will apply a preferential rate of corporation tax of 6.25% to profits from patented inventions and copyrighted software (qualifying assets) earned by an Irish company. The relief is available to companies for accounting periods beginning on or after 1 January 2016 and before 31 December 2020.
A key feature of the KDB regime is that it will be the first and only patent box in the world which will be compliant with the OECD’s “modified nexus approach”. This approach will ensure that IP income will qualify for the preferential rate where the underlying R&D activities which generated the relevant IP have predominantly taken place in Ireland.
It should be noted that under the current R&D tax credit regime, there is no requirement for the expenditure to be incurred in Ireland in order to qualify for the 25% R&D tax credit. Under the KDB regime, there must be a strong nexus to Ireland in order to benefit from the preferential corporation tax rate.
Large companies should be aware that they will be obliged to apply transfer pricing rules in certain instances.
Country by Country Reporting (‘CbCR’)
CbCR is an important part of the OECD’s BEPS action plan. It involves the reporting of revenues, profits, taxes, assets and other information to the “home country” tax authority of a group on a country by country basis.
Accordingly, the Bill contains provisions concerning CbCR and it confirms that the Irish Revenue will issue regulations setting out further details on CbCR in due course.
An Irish headquartered multinational enterprise (“MNE”) with annual consolidated group revenue in excess of €750 million will be required to provide the Irish Revenue with information for each jurisdiction in which the MNE Group operates. CbCR will apply for fiscal years commencing on or after 1 January 2016 and it must be filed no later than 12 months after the end of the fiscal year to which the report relates.
Exemption from income tax of certain expenses of a non-resident director
The Bill introduces an exemption from income tax and USC (ie. social security contributions) of certain vouched expenses of travel and subsistence of a non-resident non-executive director of an Irish company. Such expenses must be incurred solely for the purpose of attendance by such a director in his or her capacity as a director at a ’relevant meeting‘ (i.e. board meetings).
Taxand’s Take – say it again – action points and impact for your clients (200 words)
Ireland’s commitment to adhering to the aims of the BEPS project is clear from Budget 2016.
The KDB regime should further strengthen Ireland’s position as one of the most attractive jurisdictions for multinational companies when combined with the R&D tax credit regime, the intangible asset amortisation regime and the 12.5% corporation tax rate. However, it may prove to be of limited use to MNEs which engage in R&D activities worldwide.
The introduction of CbCR will highlight to foreign tax authorities, instances where Ireland is being used as a conduit and where the “Double Irish” structure is being used. Consideration should be given to the potential for the media to access certain information. Although existing Double Irish structures may continue in existence until 2020, companies concerned about potential negative publicity, may wish to consider winding down such structures before the CbCR regime is fully introduced. Such companies should then try to structure their operations in such a way as to avail of Ireland’s onshore tax regime (including the new KDB regime).
The clarification in respect of the tax treatment of the reimbursement of non-resident non-executive directors’ expenses is welcome given its prior questionable status but it may now leave resident directors at a disadvantage.
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Ireland’s commitment to adhering to the aims of the BEPS project is clear from Budget 2016.
The KDB regime should further strengthen Ireland’s position as one of the most attractive jurisdictions for multinational companies when combined with the R&D tax credit regime, the intangible asset amortisation regime and the 12.5% corporation tax rate. However, it may prove to be of limited use to MNEs which engage in R&D activities worldwide.
The introduction of CbCR will highlight to foreign tax authorities, instances where Ireland is being used as a conduit and where the “Double Irish” structure is being used. Consideration should be given to the potential for the media to access certain information. Although existing Double Irish structures may continue in existence until 2020, companies concerned about potential negative publicity, may wish to consider winding down such structures before the CbCR regime is fully introduced. Such companies should then try to structure their operations in such a way as to avail of Ireland’s onshore tax regime (including the new KDB regime).
The clarification in respect of the tax treatment of the reimbursement of non-resident non-executive directors’ expenses is welcome given its prior questionable status but it may now leave resident directors at a disadvantage.