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Tax competition hots up Back  
The UK has introduced a package of tax incentives that are aimed at attracting to the UK mobile international investment in the high tech area. Ireland may have to respond with similar measures in the areas of research and development, holding company regimes, and share options.
On March 26 the UK Chancellor took the unusual step of revealing part of the ‘good news’ element of his April budget. He did this, not merely because every politician likes to announce good news twice (at least) but because the incentives he was announcing were due to start up from 1 April. The Chancellor’s budget speech would normally have been out of the way by then but has been delayed for a month due to a family bereavement.
Britain is not a low tax jurisdiction. The corporation tax rate for larger companies is 30 per cent. It has a Revenue machine that is relentless and all embracing. Its taxation code contains every business unfriendly device yet invented – thin capitalisation, transfer pricing, controlled foreign company legislation, and myriads of specific anti-avoidance legislation. It is backed up by a judicial system that has in the past shown itself capable of making good any shortcomings in tax legislation by means of on the spot judicial invention.
Despite all of this the UK is Ireland’s major competitor for mobile international investment. It is probably because we share EU membership, Greenwich time zone, and the English language. These are all particularly attractive to the major source of mobile investment – the United States of America. What Britain does to attract US investment matters far more to us in Ireland than anything which Germany or Japan may do.

March package
The package announced on 26 March consists of:
• Capital gains tax exemption on the disposal of substantial corporate investments eg subsidiaries.
• Tax write-offs for the acquisition cost of intangibles, including goodwill and know-how.
• Tax deduction in excess of 100 per cent for research and development expenditure.
These three major tax incentives join a CGT regime that after three years has an effective 10 per cent rate on business assets. It joins an approved share option scheme that enables up to ?3m per annum per group to be focused on a small number of key employees.
This package taken as a whole makes Britain a serious contender for mobile international investment in the high tech area. This is the intent of the package, which is admitted in the Inland Revenue press release of 26 March which states inter alia ‘this (research and development tax credit) will help UK companies which are members of a larger group to attract group research and development spending to the UK’.

Intellectual property
The draft legislation has been published for much of the new reliefs. Although there has been a lengthy consultation process leading up to that, many of the details may yet change before they are enacted in the forthcoming UK Finance Act.
From 1 April companies in the UK will be able to obtain tax relief for the cost of intangible assets. This includes the cost of goodwill and intellectual property such as know-how. In most cases the amount of the deduction will be equivalent to the write-off recognised in the accounts of the company. Where the intangible is not being amortised in the accounts, a write-off at the rate of 4 per cent per annum is provided for.
The write-off will be available both in respect of the cost of purchasing intangibles, and in respect of the costs incurred by a company in creation of such intangibles. Where an intangible is disposed of, the resulting tax charge will be capable of rollover against reinvestment in new assets.
In Ireland the cost of acquiring know-how from an unconnected party can be written off, as may the cost of acquiring a patent. However a new operation setting up in Ireland is most likely to acquire its know-how from another group member and there is no tax deduction for such know-how, where it is not patented. There is no tax relief in Ireland for the cost of goodwill or for the cost of abortive capital expenditure.
When an American high tech operation needs to set up outside the United States, US transfer pricing rules will require that the overseas operation pay for the know-how being transferred to it. Payment will be taxed on receipt in the United States. Ireland’s failure to give a corresponding tax deduction is a notable handicap, compared to the situation that will obtain in the UK.

A tax exemption is introduced for gains on the disposal of ‘substantial shareholdings’. These are shareholdings in excess of 10 per cent of the shares in a trading company. It will be possible for a group to dispose of a trading subsidiary without a capital gains tax charge. There is no similar relief in Ireland. Ireland’s capital gains tax rate of 20 per cent is also significantly high compared to the effective rate available after three years of ownership of business assets in the UK, where the rate can be as low as 10 per cent.
Notwithstanding that Ireland has a charge to tax where a resident company disposes of a subsidiary (be it domestic or overseas) in practice it is unlikely that any tax would be payable where the company making the disposal is part of an international group, or is part of a quoted group. Such groups have little difficulty in structuring matters so as to avoid the charge by ensuring that subsidiaries are not held directly by an Irish company. In consequence the tax charge raises little revenue but ensures that Ireland is not a suitable location for a holding company or regional headquarters.
The UK has announced a tax deduction in an amount that will exceed the actual expenditure on research and development. The degree to which the tax deduction will exceed the expenditure has not yet been finally fixed but may be an overall deduction of 120 per cent of the sum expended on R&D.
This special deduction will be available not only in respect of increases in research and development expenditure, but in respect of total research and development expenditure, including expenditure at the current levels.
Importantly, it will be available to the company which actually carries out the research and development work as opposed to the company which commissions it, and will be available notwithstanding that the effective cost of the research and development expenditure is passed on to other group members.
There will be no requirement that the company carrying out the research and development should own the intellectual property that results from it.
The new regime is clearly designed to persuade international groups to locate their research and development efforts in the UK in that it will allow their group members world-wide to commission such work from the UK company, while holding abroad the intellectual property that will result from the research work. By virtue of the (probably ) 120 per cent tax deduction for the R&D costs, the UK operation is quite likely to be tax-free.
The new package, taken as a whole, will encourage multinationals to have their European holding company in the UK and to locate their worldwide research and development efforts close to that headquarters.

Ireland’s reaction?
Ireland bases its economic development to an important degree on a policy of low taxation for companies. To date this has been highly successful and has enabled us to compete with the UK in attracting mobile international investment. But there is no getting away from the fact that having what is effectively a zero tax regime for an international holding company and for research and development establishments must look better to the multinational than does a 12.5 per cent tax on the research and development profits, and a 20 per cent tax on disposals of subsidiaries by a regional headquarters. No tax beats low tax any day.
It is not the end of the world. We will still attract a lot of inward investment. What we won’t attract are research and development establishments or regional headquarters. Ireland has the choice of reacting to the UK measures or accepting a more limited role in competing for international investment.
Ireland is fortunate in one sense in that it derives little or no taxation revenue from research and development establishments, or from disposals of subsidiaries by multinationals, at present. It could afford to match the UK incentives measure for measure at little or no tax cost. Whether or not we do so may depend on whether our administrative and political classes have truly committed themselves to being business friendly, and on whether the aggressive tax package that the UK has unveiled will result in EU reaction under the ‘harmful tax competition’ banner.

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