Ireland: Irish Tax System – First Mover Or Last Defender Strategy

As the OECD/EU project on Base Erosion and Profit Shifting (“BEPS”) moves towards its next set of reports in autumn 2015, Ireland Inc.’s low tax offering has been, and will be, further refined.

While the 12.5% corporate tax rate remains beyond approach both domestically and internationally, the BEPS initiative has been adopted by the Irish authorities as an opportunity to demonstrate that the Irish tax offering internationally is best in class. The next few months will be key in ensuring that the Irish tax system offers a platform to do business internationally without the spectre of international anti-avoidance in favour of the larger G8 and G20 economic member countries.

In Budget 2015, Michael Noonan, the Irish Minister for Finance, introduced measures to curtail the use of Irish incorporated but non-resident companies. Under the BEPS initiative, the colloquially known “Double Irish”, alongside the “Double Sandwich” , was targeted. In the Finance Act, Minister Noonan provided a platform of certainty for existing US-parented groups that enabled them to grandfather such arrangements until 31 December 2020. In the meantime, and at the time of writing, Holland had not amended its tax laws. Whilst Ireland Inc. was widely commended for making the first move by the OECD and the wider G8/G20 countries, the Irish authorities need to be conscious of the next BEPS initiatives in developing its international tax strategy.

The Minister for Finance has begun a public consultative process in respect of the proposed Irish Knowledge Information Box. The underlying theme is clear: Ireland is seeking to locate centres of innovation here and thereby build Irish value employment centres. With tax competition between different States occurring, Ireland was posturing to have a lower tax rate applying to income flows from a wide-ranging definition of intellectual property. Discussion continues about a rate, but it is mooted to be around 5% to 6.25%.

In its interim report in September 2014, the OECD supported the notion of IP boxes that indicated in the post-BEPS regime that the IP may only benefit from a special rate of tax if it is not industry-specific (i.e. not contrary to EU State aid) and has a nexus to the underlying research and development. The latest OECD discussions, led by sponsors, Germany and the UK, appear to be limiting any IP box to patent income. In short, if a patent arises from research and development in Ireland, then income paid on an arm’s length basis to an Irish corporate will benefit from the lower rate. Unfortunately, such a regime does not fit comfortably with Ireland’s technology-led knowledge economy.

The BEPS project involves G8, G20 and other members of the OECD and other countries. The early proposal of a knowledge information box had raised hopes that Ireland would have a “bestin- class” lower tax rate attaching to a wide-ranging definition of intangible assets. Unfortunately the manoeuvres of the larger economic members of the OECD are likely to limit the benefits of such regimes to the major industrialised countries. Ireland is driving at being a “knowledge-based economy” – software and other IP is not easily capable of being patented. Therefore, Ireland’s knowledge information box is unlikely to be a key driver for future inward investment-flows.

Time will tell if Ireland’s strategy to adopt “first mover advantage” on aggressive international tax planning is correct. It would be contrary to the spirit of BEPS if strategically, Ireland should have adopted the more common Continental Europe “Last Defender strategy.” For now, Ireland needs to concentrate on ensuring its 12.5% tax regime provides the best-in-class regime for attracting high-end technology and pharmaceutical groups with major intangible assets income. The OECD debate on preferential tax regimes continues, but as long as the OECD accepts that IP boxes exist, there must be a concern that such regimes are part of a race to the lowest corporation tax rate, which is neither acceptable nor fiscally prudent.