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boxed in

Explainer: What is this 'knowledge box' and why does Ireland want to get one?

Michael Noonan wants more companies to invest their money in Ireland.

THE IRISH GOVERNMENT wants to introduce a “knowledge-development box” – better known as a patent box - as part of its tax measures to sweeten the deal for corporations as it calls time on the controversial Double Irish loophole.

The patent box would offer big incentives for companies to develop new technology in Ireland and, the government no-doubt hopes, create jobs and offset the money it loses through the tax breaks in higher overall income.

READ: The Double Irish is dead, long live the ‘knowledge-development box’ >

What is this patent box and who else is doing it?

The UK introduced its patent-box scheme last year to offer companies a tax incentive to develop new products and technology in the country.

Firms have been offered the carrot of a 10% corporate tax rate on profits flowing from patented, or unique, inventions with the changes phased in over four years.

The UK’s cut-price rate on innovations brings its corporate tax rate for businesses developing new products below Ireland’s flat rate of 12.5% and well under its own standard rate of 21%.

The low rate only applies to companies which have developed new patents with the idea being that the incentive will give businesses more financial reasons to both create and then manufacture products in the country.

It followed a similar scheme being set up in the Netherlands in 2007 with a tax rate of 10%, which was further cut to 5% in 2010, and patent-systems in Belgium and Luxembourg.

READ: Explainer – ‘Double Irish’ tax loophole in the firing line >

READ: David Cameron is not happy with Ireland’s tax regime – because he ‘wants our jobs’ >

Cameron selfies UK prime minister David Cameron - not a fan of the Double Irish, but loves his patent box PA Wire / Press Association Images PA Wire / Press Association Images / Press Association Images

What does it mean for the bottom line? And can you even do that?

The UK’s patent box scheme was estimated to have cost the country £300 million (€378 million in today’s money) in lost tax revenue last financial year and the bill has been forecast to hit £1 billion (€1.26 billion) in 2017.

The as-yet-unknown flipside to the deal is the extra tax income and jobs the incentive generates through more investment, and in keeping local SMEs and other domestic businesses in the country.

So far there has been little hard evidence on how effective the scheme has been in attracting business, although pharma giant GlaxoSmithKline announced it was building a £500 million factory in the UK in the wake of the changes.

But the jury, or in this case as the European Union, is still out on whether the UK and Dutch schemes, among others, amount to illegal state aid.

A final EU decision on the schemes are due later this year, but powerful member states like Germany have been vocal opponents of the tax incentives.

Germany China German chancellor Angela Merkel has resisted calls from her country's business lobby for a patent box Steffi Loos / AP/Press Association Images Steffi Loos / AP/Press Association Images / AP/Press Association Images

So what is Ireland doing now? Nothing?

Ireland already offers generous tax incentives in a bid to lure businesses to spend big on developing new products in the republic in the form of a 25% “research and development” credit which means companies can offset a share of those investment costs against any tax they have to pay.

A review of that system found it had benefited 1,500 companies in 2011 and financed about a third of the firms’ innovation costs, but at a cost to the state of €261 million in lost taxes.

READ: Ireland second to Bermuda as ‘conduit’ for taxable income of multinationals – IMF staff paper >

READ: Tax inversions inverted: US moves on loopholes used by Ireland-based companies >

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