The Knowledge Development Box
Question: 'Figures revealed in the Tax Strategy paper reveal that the Knowledge Development Box, has by any standards not been a success, as only a handful of companies have availed of it (12 in 2016, 13 in 2017, and ‘less than 10’ in 2020). The TSG report says that “In part this is due to the restrictive requirements of the relief”. It also points out that Sunset Clauses, (KDB is currently set to expire on 31 December 2020) are good practice, and raises the possibility that it should be rolled over nevertheless. In your view, would there be any interest amongst companies in improving the benefits in the Budget, where possible, and where compliant with overall BEPS objectives, etc?.'
Geraldine McCann, Director, Corporate and International Tax, Deloitte: When the then Minster of Finance, Michael Noonan, announced in Budget 2016 the introduction of the Knowledge Development Box (“KDB”) with the possibility of the 6.25 per cent rate that would apply to profits derived from patented or similarly protected inventions and copyrighted software, the news of this rate was broadly welcomed by companies. The intention was that the KDB regime (which meets the OECD’s “modified nexus standard”) would enhance Ireland’s offering as an IP location alongside the 12.5 per cent corporate tax rate, the R&D tax credit and the IP amortisation regime.
Where a company has R&D performed in Ireland that makes a significant contribution to the creation of qualifying assets in Ireland, and which in turn generate profits for the Irish R&D performing company, the KDB can provide a useful mechanism to reduce the effective tax rate of a company. However, as the numbers have shown, only a small handful of companies have to date availed of the regime.
This limited uptake was anticipated by many tax advisors at the outset, due to both the narrow scope of what constitutes as qualifying assets for the purpose of the relief and also the nature of the ‘modified nexus’ model developed by the OECD and encompassed in the KDB regime is such that there is onerous ‘tracking and tracing’ requirements in order to claim the relief.
In terms of what qualifies for relief, the relief is limited to copyrighted software, patented or similarly protected inventions and, in the case of smaller companies, registered inventions that are certified by the Controller of Patents to be novel, non-obvious and useful.
In relation to the “tracking and tracing” requirements, separate profitability streams need to be computed for each individual qualifying asset, in determining the extent of any tax benefit under the Irish KDB regime. This results in an administrative burden that needs to be considered by companies. In addition, companies are aware that if KDB amounts are scrutinised by Revenue, the documentary evidence that will be required to defend the claim will be substantial.
This requires the necessity for good systems and controls around R&D project management, to minimise cost, time and effort. While some industries e.g. the pharmaceutical industry already has certain ‘serialisation’ features that will alleviate this burden to some extent, for the most part no such features exist in many industry sectors.
From experience, companies initially are interested in the KDB regime given its potential to reduce the effective tax rate. However, once the limited scope of the regime and the tracking and tracing provisions is understood, many companies ultimately decide not to proceed any further. If the Budget was to expand the scope of what constitutes as qualifying assets, this together with a pragmatic approach in dealing with the tracking requirements, may lead to a greater increase in the uptake of the relief.