KPMG partners Andrew Gallagher, Daniel Thomas, Damien Flanagan and Ken Hardy detail changes to the R&D tax credit regime and other business tax measures in Budget 2023
Earlier this year, the Department of Finance conducted a public consultation on the R&D tax credit and the Knowledge Development Box. In our submission to the Department of Finance, KPMG recommended that the following important changes should be made to the R&D tax credit regime:
Amendments to the design of the refundable element of the R&D tax credit, so that it would comply with both new US tax regulations and OECD Pillar Two requirements. These changes are critical to ensure that the R&D tax credit continues to be relevant when companies are considering Ireland as a location for international investment in R&D.
The current Irish repayable tax credit regime allows cash to be refunded over a three year period. It would be more advantageous for companies, and SMEs in particular, if the cash refund was available in full, or at least up to a certain minimum amount, in the year of the claim.
We welcome the minister’s statement that amendments will be made to the payment provisions of the R&D tax credit, to ensure it aligns with the new international definitions of refundable tax credits.
The key changes outlined are as follows:
In Association with
+ The existing caps on the payable element of the R&D tax credit will be removed.
+ A new fixed three-year payment system will replace the current method of accessing the R&D tax credit through corporation tax offsets and cash refund instalments (under the current system, most refunds are fully received within three years, however, there can be limited circumstances where this is not the case).
+ Under the new system, a company will have an option to request either payment of their R&D tax credit or for it to be offset against other tax liabilities.
+ The first €25,000 of R&D tax credit claim will now be payable in the first year. This will provide a welcome cash-flow benefit for small and micro companies which make up two thirds of claimants and will hopefully encourage more companies to engage with the regime.
No further detail has been provided about how these changes will operate in practice. It is critical that the mechanism by which these changes are implemented provide clarity for international companies so that they achieve the aims set out by the minister.
Agri-business measures
During the course of his budget speech, the Minister for Finance acknowledged the challenges facing farming communities as they deal with rising input costs while moving towards a sustainable future.
To support these farming families, the minister announced his intention to extend a number of important agricultural reliefs which were set to expire at the end of the year. The proposed extensions are dependent on the outcome of negotiations at a European level on the Agricultural Block Exemption Regulation.
Stamp duty exemption for young trained farmers The stamp duty exemption for the conveyance of farmland to eligible trained farmers under the age of 35 is being extended to the end of 2025. In the absence of this exemption, such conveyances would generally be charged to stamp duty at a rate of 7.5%.
Farm consolidation stamp duty relief Farm consolidation relief applies a 1% stamp duty charge (instead of the normal rate of 7.5%) on the net consideration where farm holdings are consolidated by way of linked sales and purchases of land that take place within a 24-month period. The relief is being extended for a further three years until the end of 2025.
CGT relief for farm restructurings Capital Gains Tax relief for farm restructuring allows farmers to claim tax relief on gains arising from the sale of farmland when the proceeds from the sale are reinvested in acquiring new farmland within 24 months. Full CGT relief is available where the purchase price of the new land exceeds the sales price of the old land, and partial relief is available where the sales proceeds exceed the purchase price. The relief has been extended until the end of 2025.
Enhanced stock relief Under existing legislation, young trained farmers and registered farm partnerships are eligible for enhanced relief at rates of 100% and 50% respectively for increases in the value of stock. These enhanced reliefs are being extended for a further two years until the end of 2024.
Accelerated capital allowances for the construction of slurry storage facilities In an effort to assist the agri-business sector in further adopting environmentally positive farming practices, the minister has proposed an accelerated capital allowance scheme for the construction of new slurry storage facilities. The new scheme will allow farmers to write off over two years the capital cost incurred in constructing these facilities rather than the usual seven years. The new scheme is set to be introduced from 1 January 2023 and will run for three years.
Knowledge Development Box
The Knowledge Development Box regime has been extended for a further four years to accounting periods commencing before 1 January 2027. While we welcome the extension of the regime as companies need a long-term incentive to make investment decisions, it would be preferable if the regime were made a permanent fixture of the tax system.
The Knowledge Development Box will be impacted by changes in the international tax environment, specifically under OECD Pillar Two. The government is taking initial steps to prepare for these changes by increasing the effective tax rate of the regime from 6.25% to 10% (subject to a Commencement Order).
Pillar Two includes a Subject To Tax Rule, whereby countries may apply a withholding tax on interest, royalties and defined payments where the recipient jurisdiction applies a nominal corporate tax rate of less than 9% to the payment. Increasing the effective rate of the Knowledge Development Box to 10% is designed to deal with this and the measure will be brought into effect once agreement is reached by the OECD.
While we welcome this change, under the OECD Pillar Two rules, profits taxable under the Irish Knowledge Development Box regime will be included as GloBE income in line with accounting principles and will be subject to the minimum effective tax rate.
Despite the deemed tax deduction under Irish domestic rules resulting in the Knowledge Development Box profits effectively being taxable at the proposed new rate of 10%, these profits will be within scope of GloBE and will be subject to the minimum effective tax rate of 15%.
This may give rise to additional top-up tax payable on these profits, thus almost entirely negating the benefit of the regime for in scope multinational companies. We have recommended that consideration is given to further adjusting the regime so that it falls within the definition of a ‘qualified refundable tax credit’ under Pillar Two rules. This would help ensure that the regime remains a viable incentive.
It is worth noting that for indigenous and other companies that will not be impacted by the proposed minimum effective tax rate of 15% because they are under the turnover thresholds and will retain a corporation tax rate of 12.5%, the increased tax rate of 10% will significantly reduce the benefit of the regime.
Given the low numbers that currently avail of the KDB, this change is unlikely to help with the uptake of the relief.
Film Relief/Multimedia Industry
The minister announced that, in recognition of the long production cycle for audio-visual productions, the film corporation tax credit will be extended for a further four years to 31 December 2028.
The minister also signalled an intention to explore opportunities to encourage international players in new and innovative multimedia industries to locate in Ireland. This is with a view to sustaining and bolstering employment in this sector.
Bank Levy
The budget includes provisions to extend the bank levy for a further year to the end of 2023. The levy is calculated by reference to the amount of deposit interest retention tax (DIRT) paid by a financial institution in a specified base year.
It was originally designed to produce a fixed annual yield of €150m, but only €87m will be raised in 2022 in light of the exclusion of Ulster Bank and KBC Bank, further to their exit from the market. The same yield is projected for 2023.
The minister also indicated his intention to consider the long-term future of the levy following the publication of the report of the Retail Banking Review.
Other financial services measures
The minister announced a review of certain aspects of Ireland’s tax regime for financial services following the recently published recommendations made by the Commission on Taxation and Welfare.
Review of certain investment products The government will establish a working group to consider the taxation of funds, life assurance policies and other investment products. The Commission suggested that the main goals of such a review should include how to simplify the tax treatment of investment products generally and the identification of opportunities for greater promotion of horizontal equity and neutrality in the taxation system when it comes to investment decisions.
In this regard, the level of tax required to be deducted at source by funds and life assurance policy providers was gradually increased to 41% a number of years ago in respect of both income and gains i.e. above both the higher rate of income tax and capital gains tax rate. We therefore expect that one of the key focus areas for the working group will be the scope and possible impact of reducing these rates, similar to the reduction in the rate of DIRT that was introduced several years ago.
Review of Section 110 regime The minister also announced an intention to commence a review of the Section 110 regime, as recommended by the Commission on Taxation and Welfare. The Commission raised this in the context of the role of institutional investors in the Irish property market.
However, acknowledging that the Section 110 regime applies to a broader range of assets than debt secured on Irish property, the report went on to recommend a wider review of the Section 110 regime generally.
