Finance Department Must Think Inside The ‘Box’The proposed Knowledge Development Box (“KDB”) will provide for a preferential effective tax rate for income generated from qualifying intellectual property (“IP”) located in Ireland.

Following last year’s budget, the Department of Finance (“The Department”) launched a public consultation in January 2015, seeking written submissions from interested parties regarding the proposed introduction of the KDB. It has recently published a feedback statement addressing the main issues arising from this process. Discussions at the OECD Forum on Harmful Tax Practices confined the definition of qualifying KDB assets to patents and “assets that are functionally equivalent to patents”. The Department has acknowledged that one of the key concerns raised in the submissions was the scope of the type of assets that would qualify for tax relief under this restrictive definition. The predominant view was that defining qualifying assets too narrowly would lead to a distortive economic effect as only certain sectors engaged in activities that use patents would benefit.

The corresponding scheme in the UK is very broad and has progressed well beyond the parameters of the OECD constraints, as noted by the European Commission in its October 2013 report (which found aspects of the UK’s scheme to amount to harmful tax practices). As a result, the UK is presently conducting a consultation into changes to its regime.

Of key importance for the Department is striking the right balance between introducing a competitive KDB regime on the one hand and staying compliant with the OECD requirements regarding acceptable tax practices on the other. In a positive development the Department has outlined a potential definition at page three of its response which, while still narrow, attempts to include copyright and other rights relating to computer software.

Ireland’s KDB scheme will continue to be considered until the end of August 2015, and it is possible that the present definition of qualifying assets may be expanded further. Of course, any activities which cannot benefit from the KDB scheme will still be able to avail of Ireland’s standard 12.5% rate. Nevertheless the Department has committed to Ireland introducing a “best in class” regime and it remains to be seen whether it can truly deliver on this promise.

Contributed by: Charleen O’Keeffe - Associate at William Fry.