Cantillon: Budget favours grassroots over FDI sector

It was more a budget for the grassroots businessperson than for the tech entrepreneur – or the foreign direct investment (FDI) sector.

The self-employed grassroots will welcome the €550 boost from the new tax credit, in particular, and some may benefit from a cut in the capital gains tax rate for business sales. Hauliers and owners of bigger vans will also benefit from excise cuts.

The venture capital and investment sector, however, are less pleased, arguing that the incentives here for start-ups lag well behind what is on offer in, for example, the UK.

However, one of the interesting issues is just what is on offer now to the FDI sector, after the closure of the double Irish tax relief to new entrants. A lot of budgetary noise was made about the knowledge development box, a new tax incentive that will offer a lower tax rate of 6.25 per cent on profits that emerge from research and development activity.

When first mooted, tax experts felt this could be a significant incentive for some of Ireland’s big multinationals. However, while we have still to see the detail in the forthcoming Finance Bill, all the signs are that the new relief will be quite restrictive.

It will draw the definition of the type of spending that qualifies, and where it is conducted, quite tightly.

It may encourage both multinational and Irish firms to do a bit more R&D here in the future, but will not encourage the kind of creative tax accounting which allows significant tax gains.

The Government and the IDA are making much of the new box being “ fully OECD compliant” – in others words fully in line with new rules emerging from this body on how firms are taxed.

The thing is that these rules are quite limiting. The knowledge box is not going to make a big difference to Ireland’s FDI offering.