| Being business friendly |
Back |
| Our current 10% corporation tax rate and prospective 12.5% corporation tax rate are world beaters. However incoming investment in high tech areas, attracted by these rates, faces problems from out of date rules. |
Incoming investment to Ireland (on which our prosperity depends) encounters at least three obstacles. These are:
• restrictions on tax relief for payments to acquire know-how and technology
• withholding taxes on patent royalty payments
• foreign withholding taxes especially in the many states with which we do not have a double tax agreement.
The first two problems are self inflicted problems which raise no significant tax. The third is a problem we can reduce. They are matters that could and should be dealt with to make the Irish tax system business friendly especially for an incoming investor.
Start up technology
A new project in Ireland in the high tech sector will usually require the buy in from the foreign parent of accumulated technology for use in the operation. If that technology is patented, a write-off may be available over a period of up to 17 years. A deduction is available for the purchase of computer software albeit only over seven years. These deduction periods are far too long for high tech intellectual property.
If it is not patented or software the normal deduction for the purchase of know how is denied where the purchase is from a connected party, as it almost always will be. In the context of economic development, this rule is nonsense. It probably had its origins in an attempt to ensure that Irish taxable income wasn’t diverted overseas. Irish economic development strategy, and the Irish tax system, is in reality driven by attracting in overseas projects, and not in attempting to restrict the activities of domestic operators.
The concern here is not with granting some special tax break to the foreign investor, but merely ensuring that they do not face an actual tax penalty. For example, US tax rules will almost certainly force a US multinational to require its new Irish operation to pay full value for any technology transferred. The payment is likely to be treated as taxable income in the United States. Unless a compensatory deduction is available in Ireland, the tax penalty involved is considerable.
Patent royalties
Patent royalties have to be paid under deduction of withholding tax at the standard rate of income tax. They can be relieved if a double tax treaty has application. It is quite common that the technology which a start up of a multinational organisation has to use will have to be licensed from part of the multinational group. It is often the case that the entity granting the licence is not resident in a treaty state.
Given that Ireland is indifferent to charging a withholding tax on a payment to a treaty state, it is difficult to see why it should be very attached to a withholding tax in other circumstances, where it gets in the way of economic development. As a broad principle, business receipts are not the subject matter of withholding taxes when paid out of Ireland. Nowadays patent royalties are essentially business receipts and not passive investment receipts. It is anomalous that we continue to attach a compulsory withholding tax to them.
Tax treaties
Ireland is now the world’s largest exporter of software. Many other of its products are also digital or high tech. Such products are often not sold outright but are licensed in order to protect them from piracy. The commercial reality is a sale, but the legal form may be the granting of a licence. Many foreign countries impose withholding taxes on payments in transactions structured as a licence, even where the commercial substance is a sale. This is becoming an increasing problem for Ireland’s high tech export industries.
Ireland has expanded its range of double tax agreements quite remarkably in recent years. However the rate of expansion could be much greater if a relatively small increase were to be arranged in the manpower resources of the Revenue Commissioners in their international section. The area of double tax agreements is important to our economic development and is one which should receive priority in allocating staff resources. |
Shaun Murphy is a Tax Partner in KPMG.
|
| Article appeared in the August 2000 issue.
|
|
|
