The tax disadvantage

Despite Ireland’s much-vaunted 12.5 per cent rate of corporation tax, there is mounting anecdotal and other harder evidence to suggest that Ireland’s personal tax regime is costing the country jobs and investment. In addition, the tax regime for entrepreneurs and SME owners is seen as putting them at a competitive disadvantage to their UK counterparts.

Indeed, there is general agreement that, as a country, we have got the corporation tax regime right but that many other elements of the tax system could be working against us when it comes to international competitiveness. There is also broad agreement that this position will only be exacerbated by Brexit – regardless how hard or soft the eventual outcome.

"The degree of urgency around Brexit has been emphasised by State agencies, who say companies cannot wait until the negotiations conclude but must act now," says Olivia Buckley, communications director with the Irish Tax Institute. "The same degree of urgency must also apply to the tax policies that can help them. Ireland needs a strategic tax strategy that speaks directly to the Irish indigenous sector."

According to Buckley, highly skilled talent, R&D and innovation and finance are key to equipping Irish companies for the global challenges and opportunities ahead. “However, in many instances, these export ‘enablers’ – skilled talent, innovation, R&D and finance – are weakened by the relevant tax policies, rather than strengthened by them. The fact is, many of our tax policies do not reflect the scale of the challenge for Irish businesses and indeed the degree of their ambitions.”

Dublin Chamber of Commerce director of policy and international affairs Aebhric McGibney sees a clear and present danger to Irish SMEs arising from the tax implications of Brexit. “Brexit is a risk,” he says. “The UK will no longer be bound by EU state-aid rules following Brexit. If they decide to support industry through their tax system, it won’t be on the basis of the level playing pitch we have now. We will still be subject to EU competition rules and there will be nothing we can do about state aid to industry from the UK government. We do need to keep a careful eye on that.”

Cormac Kelleher, international tax partner with Mazars, puts it quite succinctly. "If your nearest neighbour is able to do things, you need to be able to match them."

Former Institute of Certified Public Accountants Ireland president Brian Purcell also believes Brexit has made the tax disadvantage an even more pressing issue. "Lot of things are quite rightly done to support multinational companies," he says. "But indigenous business will be even more important post-Brexit. We need to give them every leg-up we can when it comes to the tax system."

Interestingly, personal taxation has emerged as an issue not just for indigenous business but for FDI as well. “Companies look at a combination of corporation tax and personal tax when comparing locations,” says Kelleher. “Ireland is a more expensive jurisdiction from a personal taxation point of view. We do have SARP [Special Assignment Relief Programme] and so on but we are not competitive in that perspective. A lot of jurisdictions have similar regimes in place. SARP means that 30 per cent of an employee’s income over €75,000 is not taxed. That may sound very attractive to an Irish taxpayer but when you compare it to the Dutch or UK regimes, it’s not so attractive. We need to incentivise key decision-makers in FDI companies to come to Ireland. If we are not getting them to come here, they won’t be lobbying and pitching for the next project or mandate for this country.”

Olivia Buckley also believes this presents a problem. “Employees in Ireland have some of the highest effective tax bills in the world at certain salary levels,” she points out. “These high rates are set against the backdrop of a major skills shortage in Ireland, made worse by the fact there is an intensive global contest for those high skills. For example, almost 3,000 vacancies in ICT are currently listed on a Government-backed website aimed at attracting tech talent to Ireland and 81 per cent of Irish CEOs believe the lack of availability of key skills is a top business threat to growth. Irish SMEs with exporting ambitions need the best of human capital and talent to build strategic management expertise, innovation and R&D capability and drive export-led expansion.”

Brian Purcell sees Ireland’s tax regime as a competitive disadvantage. “Ireland is a very high-tax country when you take away the corporation tax regime,” he argues. “An Irish person reaches the marginal rate at €33,800; it’s £150,000 [€170, 800] in the UK. Irish tax rates at average salaries are very uncompetitive. In Ireland, you can hit the top level just by doing a bit of overtime.”

Increase thresholds

There is both a need to increase the thresholds and lower the rate, according to Aebhric McGibney. “Fifty per cent should be the upper limit when everything is added up,” he says. “At the moment, it’s 55 per cent. If we want people to come and work here, the high marginal tax rate is a disincentive. If we get it right, the benefits to the economy could be enormous.”

Capital gains tax is another issue. “Ireland’s capital gains tax rate of 33 per cent is the fourth highest in the OECD and 10 percentage points above the median rate in the OECD,” says Buckley. “It is dampening business activity in Ireland and causing stagnation in terms of the necessary scaling, capital investment and purchasing and selling of businesses that is at the core of creating the dynamism that the IMF says is necessary, given the global threats we face.”

McGibney and Dublin Chamber of Commerce would like to see the rate cut to 20 per cent for gains on investments in indigenous SMEs. “If we want to encourage people to invest in indigenous companies, we need to see a lower tax rate. If I invest in an early-stage company, I have no idea how it’s going to perform – it’s high risk.”

That level of risk should be reflected in the tax system, he believes.

Share options are another form of investment in companies and incentive for staff that needs to be addressed, according to McGibney. “If you get shares in the UK you only pay tax when they are sold. Here you pay income tax on them the day you get them.”

Brian Purcell echoes that point. “Share options are taxed as income once you exercise them. You don’t even have to sell them. In the UK, the first £250,000 worth of shares in an SME are taxed as a capital gain. Multinational employees here pay a phenomenal amount of tax on their share options. There is no doubt that this is a significant issue for them.”

The other area of the tax code which is acting as a brake on business activity is the special entrepreneurs’ relief granted to business founders selling their businesses. A special capital gains tax rate applies to the first €1 million of the sale price. However, the corresponding figure in the UK is £10 million, or more than €11 million. This is having a distorting effect.

“Dublin Chamber would like to see Ireland move towards the UK level,” says McGibney. “We also believe that many decisions by business owners to move to the UK are motivated by a desire to avoid tax in future. This is resulting in a loss of business activity to the economy as well as the CGT at the end.”

The relief has other limitations which could be addressed, according to the Irish Tax Institute. “It locks out third-party investors, including the important ‘angel investors’ who are willing to invest their money, experience and industry expertise in ambitious young companies, without being involved in their day-to-day running,” says Buckley. “In an economy that faces risks and vulnerabilities, the existence or indeed continuation of such a restrictive policy does not speak to the ambition of the country or the ambition of the Irish businesses seeking to scale up and expand their export capacity.”

The good news is that there are signs of progress on all of these issues, but the bad news is that it's not nearly fast enough given the pace of events relating to our nearest neighbour. McGibney believes the solution lies in a change of mindset at the Department of Finance.

“When counting the cost of a cut, the department just looks at the reduced tax take which will result,” he says. “They take no account of things like the sale of companies being done overseas and the tax on those being lost to the Exchequer. Unfortunately, the way the department looks at these things takes no account of changes in behaviour. The department needs to understand that not lowering rates could actually be lowering revenue. When they look at the so-called fiscal space, they only see the €300 million cost for tax cuts but they are not looking at the increased activity which a cut would stimulate.”