Industry presses for share-option tax reform

Mary Harney was in the frontline of an unusually direct pre-Budget submission last week - one which is regarded as fundamental to securing the future of the Irish technology industry.

With the Tanaiste present for a function at the Cork offices of chip design house, Silicon Systems Limited (SSL), its chief executive, Mr Brian Long, moved to step up industry pressure for a repeal of the legislation governing taxation of employee stock options.

The necessity for such a change is underlined in the Irish Software Association's position paper on the Taxation of Share Options which was published last June. But momentum is building as Budget day approaches.

Gains made from conversion of employee stock options to cash are taxed at the higher income rate of 46 per cent. The ISA is now calling for stock option returns to be charged as a capital gain at the rate of 20 per cent.

Speaking at the opening of SSL's new Cork facility, Mr Long said: "It is illogical and unreasonable that this capital gain be treated by Revenue as ordinary income, and as such, liable to tax at 46 per cent. This is singularly the greatest barrier to attracting experienced talent to this country. Indeed, it puts Ireland at a serious competitive disadvantage."

SSL spent the last two months trying to woo five people from the US to work in Dublin. The crux of the deal hangs on the share-option package, and already SSL has lost two potential candidates.

"Several years ago financial capital was the problem in Ireland, now it's human capital. This is the most fundamental issue we face," says Mr Kevin Fielding, chief operations officer of SSL.

Irish people, once glad of a job, any job, are balking at the prospect of joining a company without a share-option scheme.

Most companies worth their salt have put - or are in the process of putting - such schemes in place as a means of easing pressure on basic salaries and responding to labour shortages.

Although Government departments and development agencies have recently indicated they understand the growing need to reward employees through noncash incentives, they harbour serious concerns about the potential for their abuse.

These fears stem from the abuse of certain bonus schemes in the financial services sector in the late-1980s, when gains from shares could be legitimately taxed as capital gains.

Ms Katherine Lucey, director of the Irish Software Association, says: "It is critical something happens in this Budget. We are already seeing jobs go to India, Singapore and the Philippines because of this. It's hard to see where increased value-added jobs will come from if we can't attract the right people."

Despite the growing anticipation of change, there are fears the legislation might be amended only to place a cap on the minimum amount of shares that can be converted tax free, after which the remainder will be taxed at the usual higher income rate.

There is a general consensus that such action would only stymie employee incentives to work towards a company's success at a later date. A similar scheme was put in place in Britain and has been widely deemed a failure. Just last week, the British chancellor Mr Gordon Brown, further amended the legislation to allow employees purchase company shares out of pre-tax earnings, with the companies allowed to match these shares by twice as many again. The move met with a lukewarm industry response.

As one industry source put it: "Employees have invested their human capital, why should they be treated differently than a merchant banker or venture capitalist that has invested only financial capital."

The widely held view now within the industry, is that a taxation of share-option schemes of 20 per cent - the capital gains tax rate - will position the State as an attractive location for individuals in the same way the 10 per cent corporation tax attracted multinational companies.

In particular there are very serious concerns that the progress being made by indigenous companies will be thwarted as established share-option schemes in publicly quoted companies prove a more attractive option.

According to Mr Gerry Jones, chairman and chief executive officer of International Test Technologies, and chairman of the Irish Software Association: "Microsoft share options can be viewed on a screen daily. Share options in private companies carry extra risk. Will its value increase, or will it have liquidity? This is why we need to reduce the tax on these shares, so the reward can be increased and the risk reduced."

The Tanaiste, Ms Harney, responded - unscripted - relatively positively to SSL's Mr Long last week. She said she recognised current tax rates represented an obstacle to future growth, and supported a lowering of both tax bands in the next Budget. The recent creation of an additional 100,000 jobs, she said, would offset any tax reduction.

Although Ms Harney did not publicly endorse the ISA proposal to apply capital gains tax to share options, she said a scenario which might be considered would be the taxation of stock options at the ordinary rate of income tax. This rate could fall to 22 per cent after the Budget, and would represent a widely popular move for the Irish technology industry, as there would be little difference between this lower tax rate, and the 20 per cent capital gains tax.

Details apart, the need to implement some kind of strategy to attract the brightest and best to the Republic is now a matter of urgency.

According to Mr Jones: "We are certainly hopeful there will be movement in this area very soon. There has to be, otherwise, and I can assure you of this, [the Government] is sowing the seeds of destruction."