It has been well publicised since its introduction in 2016 that the Knowledge Development Box (“KDB”) tax regime is extremely complex and restrictive. It is understood that this is due to the requirement that the regime is OECD compliant. The Department of Finance Budget 2023 tax strategy paper re-enforces this point and openly calls in to question the merits, or otherwise, of maintaining the regime. The regime is due to cease at the end of 2022 unless provisions are made in legislation to extend the regime. As part of the paper they have set out:
- Uptake: The number of companies claiming KDB relief peaked at 20 in 2019, with the value of the relief for 2019 at only €14M.
- 2022 Department of Finance Consultation on the KDB regime: The KDB consultation process was carried out by the Department of Finance in 2022 as part of the R&D tax credit consultation. Smaller companies noted that the administrative burden regarding patenting and claiming the KDB were discouraging, while larger companies suggested that the global nature of their R&D efforts meant that the ability to determine the income that might qualify for the KDB regime in Ireland was difficult. On a more positive note it has been suggested that the uptake of the KDB may increase as companies now understand the requirements and can actively plan to avail of it, albeit there would be a lag on claiming as the R&D activity would need to be completed first in such cases.
- OECD BEPS Pillar Two impact on KDB benefit: It has become clear as part of the OECD BEPS Pillar Two process that it is likely that the KDB regime benefits may be diluted, or may require double taxation agreements with up to 33 countries as it is presently. As such, the Government are considering three options as follows:
- Extend the KDB at the current effective 6.25% rate,
- Extend the KDB but increase the effective tax rate to 9% or above, or
- Allow the KDB to cease.
In the absence of the Pillar Two complexity it would likely be an easy decision to extend the KDB regime until more data could be seen as to whether the numbers availing of the regime increased. However, with this added complication there is a strong chance that option 3, i.e. cessation of the KDB regime, may be the path chosen by Government.
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