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Irish tax update - Apple and the Knowledge Development Box

Peter Vale Peter Vale

The past week has seen significant coverage of the European Commission’s case against Apple Corporation. Attracting much less attention was the publication of the Irish Revenue’s guidance notes in respect of the Knowledge Development Box. Both of these topics are covered below.

Apple case

As widely covered, the European Commission found against Ireland in its recent State Aid case, concluding that Apple had received a tax ruling that was not available to other companies.

While the verdict in the case was not a huge surprise, the size of the tax exposure, €13bn excluding interest, was unexpected.

At the core of the case was an Irish incorporated company, not tax resident in any jurisdiction. The Commission appeared to have a fundamental issue with this aspect and concluded that all of the profits of this company must be part of its Irish branch on the basis that they could not find much activity in the head office company.

While the full ruling has not been published, it is difficult to follow the Commission’s analysis. Broadly, a non-Irish tax resident company can only be taxed on its Irish income. While State Aid rules apply across the EU, countries retain their sovereign right in terms of setting domestic tax legislation. Thus the amount of tax payable should be calculated under equivalent Irish tax measures that existed at that time. The Commission cannot impose its own tax rules in adjudicating on the Irish tax bill; it must be calculated on the basis of Irish tax legislation.

Not surprisingly, Ireland will appeal the ruling through the European Courts, a process that is expected to last a number of years. In the meantime it appears we will be obliged to collect a significant amount of tax from Apple, with the suggestion that the money is held in an escrow account.

It is worth noting that the Commission’s focus in the Apple case was on a legacy tax structure, one of several that have since been amended in Irish tax legislation, primarily as a result of the BEPS project but also as part of Ireland’s desire to retain a transparent tax regime. Thus the Apple ruling should not raise concerns for new foreign investment into Europe as by and large any new structures are designed to comply with the BEPS framework, significantly reducing the likelihood of a future EU challenge.

Post-Brexit, Ireland has seen more FDI interest. While the Apple ruling is unhelpful, in our view it should not impact on our ability to attract new investment.  Both the Government and the Commission agree that the ruling concerns an isolated case and does not relate to Ireland’s general corporate tax system, which continues to be endorsed by the OECD. Ireland has led the field internationally in taking specific steps to address the goals of global tax reform.


Knowledge Development Box – Revenue guidance notes published

Revenue recently published their guidance notes on the Knowledge Development Box (“KDB”). This is an income-based IP regime providing for a reduced rate of corporate tax of 6.25% on income derived from certain IP, to include patents and copyrighted software.

To avail of the KDB regime, eligibility will broadly be linked to R&D activities undertaken in Ireland, which ultimately result in the generation of the underlying IP assets. It is worth noting the more relaxed conditions for SMEs.

A link to the guidance notes is below. If you have any queries on these or would like to discuss any aspect, please do not hesitate to get in touch with your usual contact.