Ireland’s tax code is failing indigenous exporters and creating an over-reliance on foreign multinationals, the Irish Tax Institute has warned.
In a new report the institute highlights how a comparatively small group of multinationals are responsible for the lion’s share of export growth, innovation and corporation tax in Ireland. This has created a “concentration risk” at the heart of the Irish economy, leaving the State more exposed and potentially less resilient to international shocks.
The institute's communications director Olivia Buckley said the Government was relying on international exports to grow the economy and its tax base in an increasingly competitive environment.
“However, in many important aspects Ireland’s tax policies are not matching the needs of the indigenous sector, and will not drive the shift in behaviour that is required. If we want higher living standards, a broader tax base and an economy that’s resilient to external shocks, we cannot afford for this to continue,” Ms Buckley said.
In its 142-page report, entitled A Future Tax Strategy to Grow Irish Indigenous Exports, the institute highlights a number of mismatches in Irish tax policy that hinder homegrown enterprises from scaling up, investing in research and development (R&D) and diversifying their products and markets.
It pinpoints the relatively high rate of personal taxation here as one of the biggest barriers to attracting talent and addressing the skills gap, with company bosses frequently citing it as a threat to business growth.
The institute notes that there are currently over 2,800 ICT-related vacancies on technology recruitment website TechLifeIreland despite the fact that IT jobs were among the best paid.
Share option regime
It also claims that Ireland does not have a “workable” share option regime for employees, while the special assignee relief programme, designed to entice high-level talent into the country, effectively locks out Irish SMEs because it is only available to people working within a multinational group.
Another key challenge was addressing the low level of R&D spending by indigenous firms, which falls way short of the EU average. While Ireland had an attractive R&D tax credit regime, the institute says there is an extremely low take-up among SMEs as it is viewed as difficult to prepare for and administer.
In terms of financing expansion and market diversification, it lists a number of tax incentives, including the foreign earnings deduction scheme, which encourages businesses to send personnel abroad to scope out emerging markets, but which only had 144 claims made on it in 2014.
Similarly, only 25 people claimed income tax relief for key employees engaged in R&D in the same year.
“While Ireland’s 12.5 per cent corporation tax rate is valued by many Irish businesses, we have a pattern of sustained high rates across a range of other taxes that are critical for growth, and we have tax reliefs that are either not available or not accessible to Irish SMEs,” said the institute’s policy director Cora O’Brien.
Capital gains tax
The institute says another key area that needs to be addressed is the relatively high rate of capital gains tax, which at 33 per cent is the fourth highest in the OECD.
Apart from hampering investment, the relatively high rate also creates what the institute describes as “reluctant business owners” who may hold on to businesses longer than they should because of the tax implications of selling.
In its report the group also notes that the external risks to Ireland’s economy from Brexit, US tax reform and EU tax proposals are high.