Government should send clear message of stability

The business community is not expecting much that might have a positive impact for the sector, writes KEVIN MCLOUGHLIN

IN THE run-up to today’s supplementary budget there is the usual speculation as to what the Minister might announce with regard to tax measures.

Much of this speculation has centred on what are anticipated to be significant increases in personal income tax and levies; there has been less discussion as to what the Minister might say regarding taxes for business, including any stimulus for job retention and creation.

This makes sense if today’s budget is considered as a corrective extension of the main budget back in October. It is worth considering therefore what business might expect, starting with that main budget.

Then there were two significant announcements for business.

Firstly, the Government reaffirmed its commitment to the continuation of the 12.5 per cent rate of corporation tax as one of the key cornerstones of economic policy. Secondly, a number of positive changes were made to the tax credit regime for research and development which has significantly increased the level of interest within businesses for the regime. The announcement regarding the 12.5 per cent rate was critical – a key factor in investment decisions is stability.

Later this year, there will also likely be some very interesting tax developments for business.

In the autumn, the Commission on Taxation is expected to report to the Minister for Finance on a number of areas within the tax system; given the state of the public finances, there have been calls for it to report earlier.

Interestingly, its initial brief was quite broad but did include consideration of “how best the tax system can support economic activity and promote increased employment and prosperity”.

In the October budget, this was expanded to include the idea of introducing a broad tax regime to incentivise the development, ownership and exploitation of intellectual property (IP) and measures aimed at broadening the tax base. It will be critical to consider the notion of innovation in an expanded way to include its application to industry sectors which are big employers, such as financial services and the service industry generally.

Any proposed IP regime will be examined keenly by businesses, as IP has become a key factor in location investment decisions; an attractive IP regime would also complement Ireland’s stated strategy of moving up the value chain and creating sustainable high-value employment.

The business community will continue to lobby for change to the tax system for many reasons, including simplification and ease of administration. Mainly, though, it says it is due to the need for the tax system to remain internationally competitive.

This is critical as, particularly now, in a global environment where unemployment is rising, the use of tax as a fiscal tool to encourage investment and create employment is likely to increase.

As a result, tax competition globally is also likely to increase significantly this decade. The business community is often considered to be self-serving in its lobbying efforts. This fails to acknowledge that business is at the coal-face of investment decisions.

Business is well positioned to offer a view on what works within Ireland’s overall offering as a location for new investment, what does not and what improvements we can consider making in order to remain competitive.

Against this backdrop, what messages might there be today for business?

Today’s budget is expected to focus largely on increasing tax largely through personal income tax and levies and broadening the tax base.

Coupled with reducing public expenditure, the urgent need is to reduce the exchequer deficit. The presentation by the Minister of a five-year plan to put finances back on track will also be interesting, particularly within the confines of the euro zone fiscal stability pact.

Given the enhancements to the research and development tax credit regime, potential future incentives around IP and the state of the Government finances, the business sector is not expecting much that would necessarily have a positive financial impact for business.

However, in presenting the budget and the five-year plan, it is critical that the Minister sends a clear message to the domestic and international business community that, despite the tax increases announced, this is part of Ireland Inc’s plan to (i) provide short-term stability and (ii) lay the foundations for recovery and return to growth.

Short-term stability should come from sending a clear message that the Government has a well- defined, credible plan to deal with the Government finances.

Longer-term recovery should be addressed in terms of sending clear signals to the business sector that, as far as tax policy is concerned, it remains a key cornerstone of our economic development.

Encouraging companies to continue to invest is critical because, ultimately, maintaining and increasing the take from employment taxes through increasing the numbers at work is a key part of restoring health to the public finances.

Today’s budget is likely to be short on detailed measures for business. However, the Minister should give a very clear signal that Ireland is still very much open for business.

Kevin McLoughlin is a tax partner with Ernst Young