The Irish Research and Development (RD) credit is facing potential consequences due to the introduction of a 15% global minimum tax. This new tax regime is expected to significantly reduce the net benefit of the RD credit, which currently stands at 25%.
Furthermore, the Knowledge Development Box (KDB), which provides relief for innovation, is also set to be affected by the global tax deal facilitated by the Organization for Economic Cooperation and Development (OECD). The KDB has been underutilized, and multinational companies are unlikely to experience a net benefit from the relief it offers.
It is estimated that approximately 67 Irish multinationals and nearly 1,600 foreign corporations operating in Ireland will be impacted by the implementation of the 15% minimum tax in autumn 2023.
While the OECD agreement preserves the 12.5% corporation tax for companies with turnover below €750 million annually and maintains existing targeted business supports, including RD tax credits, ongoing discussions are taking place regarding the redistribution of taxing rights for the top 100 wealthiest multinationals, with concerns raised by US lawmakers regarding potential disadvantages for major technology firms.
The Impact on Irish RD Credit
The introduction of a new 15% global minimum tax is expected to significantly reduce the Irish RD credit and impact the net benefit of the credit. There have been no indications of plans to eliminate the Knowledge Development Box (KDB) or increase the generosity of the RD credit in Budget 2024.
The Irish RD credit, which provides a 25% credit for qualifying research and development activities, will be affected by the new minimum tax. The KDB, a tax incentive for innovation, is also expected to be impacted by the global deal brokered by the OECD. The KDB allows firms to pay a reduced tax rate on income from certain RD assets, but its utilization has been low.
Despite these changes, the 12.5% corporation tax rate for companies with turnover below €750m annually will be retained, along with existing targeted business supports and RD tax credits.
Global Minimum Tax Implementation
Implementation of the global minimum tax is expected to have significant implications for multinational corporations operating in Ireland. Finance Minister Michael McGrath plans to implement a 15% minimum tax in autumn 2023, affecting approximately 67 Irish multinationals and nearly 1,600 foreign corporations in Ireland.
It is estimated that around 50 countries will implement this new tax by 2025. The global minimum tax will reduce the attractiveness of the Irish Knowledge Development Box (KDB), which was launched as an incentive for innovation. Multinationals are unlikely to receive a net benefit from KDB relief, and the new tax will further impact the net benefit of the 25% Research and Development (RD) tax credit.
However, the OECD agreement retains the 12.5% corporation tax for companies with turnover below €750m annually and allows for the continuation of existing targeted business supports, including RD tax credits.
Effects on Knowledge Development Box (KDB)
Under the new global minimum tax regime, the effectiveness and attractiveness of the Knowledge Development Box (KDB) in Ireland is expected to diminish significantly.
The KDB, initially introduced as an incentive for innovation, allowed firms to pay a reduced tax rate on income derived from certain research and development (RD) assets.
However, the recent global deal brokered by the Organisation for Economic Co-operation and Development (OECD) is set to decrease the appeal of the KDB.
Multinational companies are unlikely to receive a net benefit from the KDB relief under the new tax rules.
Furthermore, the KDB has been underutilized since its introduction in 2015, with only 14 claimants in 2021.
With the implementation of the 15% minimum tax, the future of the KDB as a tool to promote RD activities in Ireland is uncertain.
