On 27 September 2022, the Irish Minister for Finance presented Budget 2023 (the "Budget") which included a statement reaffirming Ireland's commitment to the OECD's proposed global minimum effective corporate tax rate ("Pillar Two"). Importantly, the Minister also signposted a number of amendments and ongoing work to better align Ireland's corporation tax system with the Pillar Two rules, which are currently expected to be implemented by 31 December 2023.
The following reformative measures were highlighted in the Budget in relation to the implementation of Pillar Two in Ireland:
- Research and Development ("R&D") tax
credit: The existing R&D tax credit will be amended to
ensure that it is a qualifying refundable tax credit for Pillar Two
and US foreign tax credit purposes. A company will now have
an option to request payment of the credit without offsetting it
against other tax liabilities first. In addition, the current
limits on the payable element of the credit will be removed.
Transitional measures will be in place for one year to assist the
transition to the new payment system for companies that are already
engaged in R&D activities.
- Knowledge Development Box ("KDB"):
The KDB (ie, Ireland's patent box) will be extended to
accounting periods commencing before 1 January 2027 and the
effective rate will be increased to 10% (from 6.25%) to align with
the Pillar Two 'subject to tax rule' once agreement is
reached at OECD/G20 level on implementation. There were no
details on any other changes to seek to align the KDB (which
reduces a taxpayer's effective tax rate by way of tax
deduction) with Pillar Two more generally.
- Territorial tax system: The Minister confirmed that, in conjunction with Pillar Two implementation, the options for a move towards a territorial corporation tax system are being given serious consideration. The introduction of a dividend participation exemption and a foreign branch exemption would better accommodate the implementation of the Pillar Two rules by providing more clarity and less complexity.
These proposed amendments will better align Ireland's corporation tax rules with Pillar Two. We expect further details on the amendments to the R&D and KDB rules to be included as part of the Finance Bill 2022 (to be published on 20 October 2022), and further details on the move to a territorial regime to follow in 2023.
The Budget did not touch on the interaction of existing Irish corporation tax rules with the Pillar Two transition rules (which are currently stated to apply with effect from 30 November 2021). The Minister noted that work is ongoing to develop "the multiple new elements required to give effect to the Pillar Two minimum effective tax rate". However, the potential for effective double taxation on in-scope intra-group asset transfers, where book carrying value is applied for Pillar Two purposes (irrespective of the tax treatment of the transaction), is likely to require addressing at OECD / EU level.
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