Few countries in western Europe are more heavily dependent on FDI than Ireland. Few have been more successful in attracting it. Now the Irish government is offering a fresh lure to attract high-tech companies: expanded tax breaks on intellectual property (IP) spending.
Companies able to make full use of the new tax relief have the potential to reduce their corporate tax rate from an already low 12.5% to just 2.5%. By going down this route, Ireland has become one of a relatively small club of countries using low taxes on IP to attract foreign investors. Other members include the Benelux countries – Belgium, Luxembourg and the Netherlands – as well as Cyprus and offshore locations such as the Cayman Islands and British Virgin Islands in the Caribbean.
In December 2009, the UK’s chancellor, Alistair Darling, took steps to join the club. He announced plans to lower the corporate tax rate on income from UK patents to 10%, effective April 2013. “This will help maintain jobs in science and technology in this country,” he said.
Ireland’s 2009 legislation expanded the definition of property eligible for a capital allowance to include not just physical assets, but also intangible assets. As a result, capital expenditures on patents, trademarks, copyright and other forms of IP now qualify for a tax deduction. Spending to acquire, manage, develop or exploit IP rights is included.
Ireland’s 2010 finance bill, not yet enacted, extends the definition of IP eligible for the tax break to computer software.
The relief is generous – a capital allowance of up to 80% of taxable profits directly derived from exploiting the company’s IP, or earned from sales of products based on it, in a given period. Companies can choose to account for the allowance as depreciation or amortisation over seven or eight years, or write it off over 15 years. Either way, under optimum conditions they can achieve the 2.5% tax rate.
The 2010 bill also frees companies from withholding tax when they make royalty payments to a company in another EU state or one of the 48 countries that has a double-taxation agreement with Ireland. The exemption applies to royalties, dividends, interest and licence fees. Furthermore, transfers of IP are specifically exempted from stamp duty, removing a hurdle to buying in IP.
By treating actively managed IP as a trading activity and allowing companies to amortise the acquisition costs of IP over a period of time, Ireland is broadly mirroring UK law, says Matthew Oliver, a tax partner in the UK-based law firm Bird & Bird. However, he acknowledges these provisions, combined with the corporate tax rate and skilled professionals, make Ireland a very attractive location.
“You can’t just dump your IP in a country,” he says. “You have to actively manage it and you have to have the proper people to do that.”
Mr Oliver says the decision to move is complicated. Very big companies with a significant amount of IP already built up face large tax charges if they transfer it to another country. Small companies with less value in their IP are often better advised to build up their business instead of spending scarce resources on tax planning.
“It is usually larger companies, with decent size brands that still have growth in them, that are at a point in their life cycle where they can effectively divide up their IP, or put new IP into the foreign location. For example, a company that has a good brand in the US but none in Europe might put the European brand value into the new structure,” says Mr Oliver.
Race for funds
Is there a risk of a race to the bottom, with countries outdoing each other in the rush to attract FDI through IP tax incentives? Mr Oliver accepts that this is a possibility, but states that other factors will also come into play.
He notes that the 10% tax on patent income proposed for the UK is higher than the 5% offered by Benelux countries. “The UK must have calculated that companies will be willing to pay more to locate their IP [in the UK] because of the expertise and the capital markets [here], though I don’t know if that’s correct,” he says.
Conor Hurley and Alan Heuston, tax partners in Arthur Cox, one of Ireland’s ‘big five’ law firms, view their country’s IP tax relief as part of a series of building blocks in its FDI strategy.
The foundation is Ireland’s 12.5% corporate tax rate – so prized that preserving it was a condition of Irish support for the 2009 Lisbon Treaty that reordered EU operations. Another block is a 25% tax credit on R&D spending in Ireland or the European economic area. These attractions make Ireland an effective competitor with low-tax, offshore jurisdictions, says Mr Heuston.
The structure is strengthened, according to Mr Hurley, by the fact that, unlike those jurisdictions, Ireland is not a tax haven. Instead it offers the advantages of an up-to-date common law regime familiar to US and UK lawyers, IP protection, sophisticated financial services, an EU location, easy access to European markets and an educated workforce.
The new tax breaks reflect the Irish approach of identifying emerging business trends, then creating tax packages that attract inward investment, says Feargal O’Rourke, a tax partner in PricewaterhouseCooper’s Ireland office. In this case, he says, Ireland responded to a realisation of the increasing value of IP – as well as an Obama administration crackdown on companies utilising offshore tax havens, which became tempting targets for Ireland.
At least one formerly Bermuda-based company has taken the bait. In August 2009, Warner Chilcott, a global pharmaceutical corporation, ‘redomesticated’ itself to Ireland, where it already had two operations, one in R&D, and one that held various IP assets for the consolidated group.
The company’s move validated the strategy of IDA Ireland, the agency charged with attracting FDI to the country. That strategy, says IDA tax advisor Christine Kelly, is to draw in companies to establish a foothold in Ireland, such as in manufacturing, and move them up the value chain to R&D, and then IP management. However, Ms Kelly says it is too early to tell how well the new IP incentives are working.