Authors: Louise Kelly, tax partner and Andrew O’Reilly, R&D Tax Credit manager, Deloitte In this article, we will discuss the tax changes announced by Budget 2015, with a particular focus on the Research and Development Tax Credit regime. In drafting Budget 2015, the Department of Finance had to take account of a changing international tax landscape. During 2014, the focus on tax planning techniques used by multinationals has continued to intensify. Meanwhile, the OECD’s Base Erosion and Profit Shifting (BEPS) project reached the half-way mark in September 2014, when the first phase of draft reports were published. Against that backdrop, the Irish Government developed its international tax strategy for Ireland and the Road Map for Ireland’s Tax Competitiveness was published as part of Budget 2015. The Road Map re-emphasised the importance of the ‘three Rs’: • The Corporate Tax Rate of 12.5% is certain and will not be changed; • Tax Regime – there have been some positive changes in the areas of IP regime, the Special Assignee Relief Programme (SARP) and the R&D Tax Credit Regime; • Reputation – changes to the corporate tax residence rules affecting the infamous ‘Double Irish’ structure.

‘Double Irish’ structure

In recent years, the Double Irish structure, which had been implemented by many multinationals, drew a lot of attention from politicians and the press around the globe. Given the increased focus on Ireland, a consultation process was launched by the Department of Finance in May 2014 to seek views on a number of BEPS-related matters, including the appropriateness of the residence rules in the 21st century. Finance Act 2014 introduced changes to the corporate tax residence rules, which affect existing Double Irish structures and seek to ensure that post-1 January 2015, multinationals cannot establish new Double Irish structures. • There will be ‘grandfathering’ for existing structures such that companies incorporated by 31 December 2014 may continue to be treated as non-Irish-resident until 31 December 2020. The grandfathering period was very welcome and should provide groups with sufficient time to restructure, where necessary. • Committee Stage amendments that were enacted in Finance Act 2014 seek to address fears that shelf companies would be incorporated into groups during the grandfathering period. The grandfathering will cease to apply where there is a change in ownership of the Irish-incorporated company and a major change in the nature of conduct of the company’s business. Due to those amendments, it will be necessary to monitor the activities of the non-resident company, where there is a change in ultimate ownership of the group (for example, as part of a merger or acquisition).

Knowledge Development Box regime

In Budget 2015, the Minister for Finance announced the introduction of a ‘best-in-class’ Knowledge Development Box regime, which is welcome as it is important that Ireland continues to have a competitive IP regime. Details of the new Knowledge Development Box have not yet been announced and a consultation process is expected to be launched shortly. That being said, some news reports are indicating that the rate could be circa 5-6%; however, we will need to wait for the detail to be published by the Department of Finance in due course. The EU Code of Conduct Group is currently carrying out a review of nine different IP regimes in the EU to determine whether they are compatible with EU rules or whether they constitute harmful tax competition. The BEPS Project is also seeking to address the requirements to be satisfied by a preferential IP regime in order for it to be acceptable. There are different views on the parameters of an acceptable IP regime. A nexus approach has gained ground, which would require substantial activity to be undertaken in the jurisdiction offering the IP relief. However, the Nexus Approach could disadvantage smaller countries, such as Ireland, given their ability to support the large-scale R&D activities required to benefit from a nexus-based IP regime. Also, concerns have been raised, which Deloitte shares, on the compatibility of a nexus-based approach with EU law if the relief is dependent on R&D activities taking place in one particular EU Member State rather than across all Member States. If such a nexus regime is introduced, it is important that the R&D Tax Credit regime is also competitive to attract the R&D activity that may be necessary to support the preferential IP regime. We have included comments on the R&D Tax Credit regime below. As part of the Budget 2015 announcement, there was an indication that the Government will wait for the outcome of the EU review of the IP regimes and further guidance from the OECD before announcing details of the new Irish Knowledge Development Box regime, so it will be important for interested parties to continue to monitor this issue and engage in the consultation process.

Irish intellectual property regime

In addition to the announcement in relation to the Knowledge Development Box, Finance Act 2014 introduced positive changes to the existing Irish onshore IP regime (Section 291A, Taxes Consolidation Act, 1997), such as the removal of the existing 80% restriction (i.e. the requirement that the amortisation on the qualifying intangible assets and interest expenses on borrowings used to acquire those intangible assets could not exceed 80% of the relevant profits). The definition of qualifying intangible assets has also been extended to include customer lists (not acquired as part of a trade).

Special Assignee Relief Programme (SARP)

A key objective of the BEPS project is a closer alignment of taxing rights with substance, economic activities and value creation. As the international tax landscape evolves and multinationals alter their structures, we expect that some additional roles within a given organisation would move jurisdictions to support the group’s structure. It is important that Ireland has a regime that is competitive in attracting talent. The Irish SARP regime, which provides a more attractive income tax regime for foreign employees assigned to Ireland, has been enhanced by Finance Act 2014, including the removal of the income cap (currently €500,000). This is very welcome, as this should make the relief more attractive and competitive. However, some limitations remain. For example, the individual must have been an employee of the group for at least six months before moving to Ireland and, therefore, the regime does not apply to new hires. Also, the introduction of a requirement for a certification, within 30 days of the individual’s arrival, by the employer that the employee qualifies for the relief is quite onerous. From a practical perspective, Deloitte would like to see this period extended to allow companies sufficient time to manage the certification. Therefore, we hope that the regime will be enhanced further to deal with those features in future years, which would have the benefit of making Ireland a more attractive destination for talent.

R&D Tax Credit regime

Many governments contribute to companies’ research and development (R&D) activities through tax incentives. In 2013, some 27 OECD countries provided tax incentives to business with qualifying R&D expenditure. Calculating this benefit as a percentage of Gross Domestic Product, Ireland scores well internationally with regard to the incentives available for companies carrying on R&D activities here. It could be worth 25% of the expenditure incurred if your projects/activities are deemed to be eligible. Is your organisation carrying on activities that could qualify for these valuable credits? Questions to ask in this regard are: • Is the company pushing its technical teams beyond the normal expectations of professionals in their field? • Has the company developed new or improved products or processes that have been not only difficult to develop, but that have required experimentation to deliver, perhaps with some failure along the way? If either of these are the case, then you need to understand the R&D Tax Credit. If you are a claimant company already, recent changes to the programme will also interest you. The R&D Tax Credit was first introduced in Ireland in 2004. Since then, it has been changing in a positive manner in almost each variation of the Finance Act, the most recent being no exception. The R&D Tax Credit has been continually evolving with regard to the scope of the legislation, as well as the way in which it is monitored and scrutinised by Revenue. Approaching the R&D Tax Credit application process with the correct understanding of why certain activities are eligible, is critical to the successful outcome of a claim. A unique feature of the R&D Tax Credit is that you must first identify the projects and activities that are deemed to be eligible by a scientific/technical test. Then, you need to look to the legislation to see what costs can be attributed to those activities. The removal of the 2003 base year by Finance Act 2014 is a very positive change for companies that had been established pre-2003 and had significant research and development activities in that year or that did not have adequate records to determine the level of R&D expenditure in 2003. Claims from 1 January 2015 will be calculated off of a zero base year. This removes the administratively burdensome calculation of the base-year amount, and adds to the value of the claim in companies that have, up until now, had a base-year amount. It simplifies the claim process and is a very welcome announcement. Claimant companies have witnessed an increase in the level and intensity of Revenue inspection into R&D tax credit claims. As the legislation has matured and the number of claimant companies has increased, so too has the number of technical audits being carried out by Revenue. In our experience, it is common for claimant companies to misunderstand aspects of the technical/scientific test. In fact, the single most likely cause of claimant companies having to make changes to their claim at audit is errors related to the technical test.

Qualifying projects and activities

To qualify, projects/activities must be: • Systematic – that is to say, they must form part of a planned approach to achieve a specifically desired outcome. They must also be investigative or experimental in nature; • In an allowed field of science/technology; • Either Basic, Applied or Experimental Development (Experimental Development is systematic work, drawing on existing knowledge gained from research and/or practical experience, that is directed to: producing new materials, products or devices; installing new processes, systems and services; or improving substantially those already produced or installed); • Seeking to overcome technological/scientific uncertainty, and in doing so, must be seeking to achieve a technological/scientific advancement. What the above says is that new knowledge is developed that had not been available to the company carrying out the R&D activity when compared to the existing state of the art (an exploration into which is often looked for at audit stage). That is to say that the knowledge developed by the company is considered new to this field of science and technology. This means it is advancement in that field. It is worth noting that there is no obligation on the company to register or publish any IP that may be generated as a result of the work undertaken. The R&D Tax Credit is there for companies that are carrying out activities that meet the criteria set out above. Many businesses in Ireland have cyclical R&D activities; for example, they may be developing a new product, or looking for an incremental improvement in performance of an existing product, or perhaps changing materials, but looking to maintain or improve functionality. As part of Budget 2015, the Minister for Finance promised further clarity in relation to the R&D regime. We are still awaiting R&D guidelines from Irish Revenue. The additional clarity should be helpful in providing companies with more certainty with regard to the robustness of their historical claims and in supporting the booking of the benefit of the credit in the companies’ financial statements.

Conclusion

Finance Act 2014 introduced some positive changes to the Irish tax regime and given the other announcements in Budget 2015, we can expect further improvements in the coming years. We welcome the Irish Government’s commitment to ensuring that Ireland continues to have a competitive tax regime. To ensure that Ireland continues to compete for FDI projects, it is important that Ireland continues to adapt its corporate tax and personal tax regime in light of the changing international tax environment. Ireland’s R&D Tax Credit regime is very competitive and the enhancement of this regime is very welcome, particularly for groups that carried on R&D activities in Ireland in 2003, as from 1 January 2015 the base-year requirement has been removed.