The tax breaks for the knowledge development box could get the ax in the 2023 budget


The government may be willing to scrap a 6.25 percent patent tax break, but officials are more cautious about increasing a separate research and development (R&D) tax credit or reducing the capital gains tax.

The 6.25-part Knowledge Development Box (KDB) was a core piece of tax policy when it was launched in 2015, but will become unusable after new global corporate tax rules come into effect, tax officials believe.

The KDB allows a corporate tax rate of 6.25 percent – a 50 percent discount from the current guide rate of 12.5 percent – on income from R&D assets. The overall tax rate is expected to increase to 15 percent once global corporate tax rules are expected to come into effect in 2024.

Although the KDB was introduced with considerable fanfare, only 17 companies used it last year, costing the state treasury around 16 million euros. It was intended to attract more research-intensive companies and was touted as groundbreaking by then Treasury Secretary Michael Noonan.

But in a series of tax strategy papers released today, the Treasury Department appears to be saying the tax is unworkable.

Because collecting the tax is so complicated, Treasury Department officials are asking “whether a reduced KDB incentive would be attractive.”

“With a reduced incentive rate, some potential applicants may find the administrative burden too onerous, reducing the incentive effect,” the ministry said in a corporate tax paper.

Extending the current relief to 6.25 per cent would force an Irish company to pay a withholding tax of up to 2.75 per cent on gross income from patents and other research activities covered by the exemption under the new global tax rules.

It could also require the rewriting of up to 33 double tax treaties with other countries, the paper said.

The other options available are to increase the tax to 9 percent or 10 percent – which would limit the tax benefits for companies that still have access to the system – or scrap it.

Large companies with revenues over 750 million

Although this minimum rate of 15 percent is still being negotiated at EU level, it was agreed by 137 countries at the Organization for Economic Co-operation and Development (OECD) last year.

The OECD rules are set to come into force in 2024, subject to an EU agreement. The government intends to legislate for them later this year.

Meanwhile, the government said it was still reviewing possible changes to the research and development (R&D) tax credit to ensure it isn’t eroded by the new tax rules.

Advisors KPMG have proposed increasing the loan by 10 points to 35 percent. According to KPMG estimates, an R&D credit of 30 percent is the minimum required to offset any new taxes due under OECD rules and potential US corporate tax changes.

The existing 25-part R&D tax credit cost €658 million in 2020 when it was used by 1,616 companies.

Elsewhere, the tax strategy papers confirm that the government will not extend the 9 percent VAT rate for the hospitality and tourism sector, which will rise to 13.5 percent from March 1, 2023.

And officials don’t seem enthusiastic about lowering the 33 percent rate of the capital gains tax (CGT) or imposing a higher rate on high-income earners.

“The existence of a 33% CGT rate can help maintain a balance between the capital wealth tax rate and the higher income tax rate and discourage planning behavior,” says a separate paper on capital gains tax.

The Ministry of Finance estimates that a 1 to 5 percent reduction in capital gains tax would cost the state treasury between 42 and 210 million euros a year. The tax breaks for the knowledge development box could get the ax in the 2023 budget

Fry Electronics Team

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