Ireland: Moves to close one tax break and opens another
06 November 2014
Posted by: Authors: Caelainn Barr and Theo Francis
Authors: Caelainn Barr and Theo Francis (The Wall Street Journal)
Bill to end "Double Irish” also offers
corporate tax cuts on intellectual property
As the Irish government moves to close one door to corporate tax avoidance, it is opening another.
Tucked into legislation to eliminate a much criticized tax structure known as the "Double Irish” is a separate provision that would allow companies to pay no corporate tax on profits earned from patents, licenses and other intellectual property.
The legislation, which would expand a current tax break that allows companies to shield 80% of that income, also proposes to add customer lists to the types of intellectual property that can be covered.
The expanded tax provision proposed in the Irish budget would give companies an incentive to make Ireland the home for their intellectual property—some of it now tied up in Double Irish structures—as well as give them a simpler means to shield some of the same income from taxes.
"Rather than reducing tax deductibles, they have been increased in this budget,” Jim Stewart, associate professor of finance at Trinity College Dublin, said Tuesday.
Lawmakers in Ireland are debating the proposals this week. The finance bill that contains them is expected to be signed into law by year-end.
Last month, Ireland touted how the legislation would eliminate the Double Irish, a tax avoidance measure that uses a twist in Irish law to send royalty payments for intellectual property from one Irish-registered subsidiary to another that resides for tax purposes in a country with no corporate income taxes. While the total number of companies that use the structure isn’t publicly disclosed, hundreds have funneled tens of billions of dollars a year in profit to tax havens via Ireland, including many practitioners in the technology and pharmaceutical sectors, tax experts say.
The tax break could in theory benefit technology companies like Google Inc. or pharmaceutical firms like Gilead Sciences Inc., which have moved intellectual property into Irish corporate structures.
At least 249 companies used the provision in 2012, according to figures from Ireland’s tax office, the Revenue Commissioners, providing tax relief valued at €108 million ($135 million). But that total may understate the expanded provision’s potential scope. Companies have had little need to reduce the bite from Irish taxes for their intellectual property income when they could use structures like the Double Irish to escape such taxes altogether.
A Google spokesman declined to comment on specifics, but said the company is deeply committed to Ireland.
The expanded tax break is seen by proponents as a way to keep Ireland competitive as a destination for intellectual property as it prepares a longer-term package of regulations governing how such assets would be taxed. That package, referred to as the "knowledge development box,” has yet to be formalized.
It would likely echo tax structures set up in countries like the U.K. and the Netherlands—structures that have already drawn scrutiny from European Union regulators. Until then, companies may be able to turn to the larger tax break on intellectual property costs as a stopgap solution.
"What they’re seeking to create is an environment to bring [intellectual property] onshore,” Feargal O’Rourke, head of tax at PricewaterhouseCoopers Ireland in Dublin, said Tuesday.
Ireland moved to close its Double Irish tax loophole amid pressure from the EU and U.S. The measure before Ireland’s parliament would stop new Double Irish structures beginning Jan. 1, but allow existing structures to operate until 2020.
The intellectual-property tax break is more straightforward. Irish law lets a company registered in Ireland reduce its taxable income based on what it spends to acquire intellectual property. Companies amortize the cost over time, typically anywhere from three to 15 years, depending on the nature of the asset, and use it to offset income from the assets.
Irish law currently caps that benefit at 80% of the income in any one year, though unused amounts can be saved for later. The new legislation would remove that cap.
Intellectual property is difficult to value objectively, and basing tax benefits on the price paid to acquire it becomes even thornier when the transaction is between two subsidiaries of the same parent company, tax experts say. Transactions between related entities can qualify for the Irish tax benefit, including when both are Irish entities, though such sales are required to be made at arm’s length.
The American Chamber of Commerce Ireland and the Irish Tax Institute in Dublin lobbied for the new tax breaks, according to their submissions to the Irish Department of Finance. The bill went further than the changes put forward by the Chamber, which wanted the ability to offset 90% of income from intellectual property.
The Irish Department of Finance said the expanded tax break is intended to make Ireland a more attractive place for companies to locate and develop their intellectual property. Ireland already has one of the lowest corporate tax rates in the European Union, at 12.5%.
This article first appeared on online.wsj.com.