European horse breeders back Irish tax break

Business Opinion: Despite what you may have read last week about boycotts at Goffs, there has actually been an outbreak of harmony in the world of thoroughbred racehorse breeding.

And the consensus, funnily enough, relates to the Irish tax exemption for profits earned from stallion nomination fees (that is, the money paid every time a stallion successfully impregnates a mare), an incentive that the European Commission is investigating to establish if it qualifies as an illegal state aid, and is thus contrary to European competition law.

The commission has known about the incentive since the 1980s, but only began investigating it following complaints that it breached state aid rules. The complaints were thought to have come from Britain and France, our nearest competitors in racehorse breeding.

Or did they? The European Federation of Thoroughbred Breeders' Associations (EFTBA) recently agreed to write to the EU Commission expressing its support for the measure, saying that it benefited the European thoroughbred industry as a whole. The British association has also written to finance minister, Brian Cowen, saying the same thing.

It was a significant move, because it's pretty difficult to say that something one country does for its benefit distorts competition between EU member states, if the competing jurisdictions say that it benefits them as well. This is something that the commission has to take into account in its decision.

EFTBA's members, who are based throughout Europe, acted purely out of self-interest. They are the people who own the broodmares that the stallions service. They make their living by selling the progeny, and the horses sired by good quality stallions have the best chance of making a profit when they are sold.

EFTBA fears the end of the Irish tax incentive would mean that high quality stallions would leave this country for the US, or possible further away, effectively eliminating their access to them.

The reason for that is simple. The US market for racehorses is big and lucrative for breeders. Last month, at the leading US sale for yearling thoroughbreds in Keeneland, Kentucky, buyers forked out over €320 million for 3,500 or so horses. At the equivalent sale at Goffs last week, 800 horses sold for €51.6 million.

Thirty per cent of the worldwide industry is located in the US; the next nearest competitor is Australia with 13 per cent. This country ranks third with 9 per cent.

Despite the strength of the US bloodstock industry, it benefits from considerable state support. Across the US, individual states use a range of incentives, including tax breaks, prize money premia and various other concessions to tempt stallion owners to base horses in their jurisdiction.

Similarly, Australian states offer a range of tax incentives to encourage investment in stallions and bloodstock. One of them, Victoria, is looking seriously at introducing the same incentive available here. Japan is also putting a lot of effort into boosting its rapidly growing industry.

Both Japan and Australia have the biggest market in the world on their doorstep - China. And that country is starting to develop horse racing as a sport, a move that could potentially drive huge demand for stock, and thus stallions and broodmares, on that side of the world.

Whatever the reasons for it, and no matter what you may think of this rush to incentivise horse breeding, you can't argue with the fact that it exists.

More importantly, many believe it poses a competitive threat to the industry here, which is reckoned to employ 16,000 people, and to the industry in the rest of Europe, something that the EFTBA has obviously recognised.

The Irish tax break has ended up as a key defence for Europe against competition from the US and Australia. It does this because it anchors a number of high-class stallions at a number of stud farms in this country, thus ensuring that they are available to breeders in Europe.

Without those horses, those breeders in Britain, France and elsewhere will have two choices: produce poorer, less profitable products, or shift their operations to the US or wherever the horses end up. Some may be able to do this, but many will only have the first choice as an option, and fear they will go out of business.

Critics of this argument have dismissed it as scaremongering. However, there are precedents for it. Before the tax break's introduction in 1969, the majority of the leading European racehorses went to stud in the US once their racing careers ended. That still happens, purely because horses can on average command higher fees in the US than in Europe, but not to the same extent.

Other European countries have tried to combat this pattern through incentives designed to fuel demand for racehorses. These are generally funded by the proceeds of state-owned tote betting monopolies.

But they are expensive and not as effective as the Irish approach. For example, the French incentives are said to cost up to €50 million a year. In comparison, a bloodstock industry-funded report published last year estimates that our system costs €3 million in tax foregone, while generating a return to the exchequer of €37 million.

The real answer to the threat from countries like the US and Australia is for organisations like EFTBA to keep singing from the same hymn sheet and sit down with the European Commission to find a way of ensuring that the industry in Europe has a strong future.

Whatever they come up with, abandoning the Irish tax break at this stage, or compromising it in some way, would be a step in the opposite direction.