Ireland’s tax policies fail to back exporters

With alarm bells ringing regarding the difficulties posed by Brexit for Ireland and geopolitical developments stirring up uncertainties around trade and investment, there is a serious need to consider policies within our control that can help grow Irish exports. There is much that we can't control but are working to influence. However, there is much of our destiny that lies in our own hands.

The announcement by the Government that it will commission a study to look at economic opportunities for Ireland from EU Free Trade Agreements (FTA) is most welcome. It emphasises that we have a small domestic market and that, in light of challenges from Brexit, diversification into new markets and growing Irish exports in existing markets is more critical than ever.

The IMD World Competitiveness Centre ranks Ireland’s “export concentration by partner and product” as 52nd and 47th in the world, emphasising the need for such action.

Ireland has “superstar” companies which have achieved great global success. However, figures show the Irish indigenous sector generally is focused on a narrow range of export destinations. Some 27 per cent of Irish firms export to just one market. In 2015, the median number of export markets for Irish exporting firms was just three.

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The opportunities on offer from new EU FTAs with markets such as Canada and Japan herald much hope, not to mention our access to the EU market itself. The prospects are good if we can take full advantage. However, an abundance of talent, innovation and capital investment will be central to the plan.

Detailed analysis in a new Irish Tax Institute report, A Future Tax Strategy to Grow Irish Indigenous Exports, highlights a range of mismatches in tax policies that are hindering efforts to grasp global trade opportunities and meet the challenges Ireland faces. While our 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.

Capital gains tax

Ireland’s 33 per cent capital gains tax (CGT) rate is the fourth-highest in the OECD and 10 percentage points above the median CGT rate. It is dampening the appetite for the necessary scaling, investment, and buying and selling of businesses that are core to the dynamism the International Monetary Fund says is necessary for our economy. Ireland’s special “entrepreneur relief” reduces the high CGT burden on business sales to a limited degree but locks out third-party investors, including angel investors, who are willing to invest in ambitious young companies.

Talent and personal tax rates also present challenges. There is an appreciation that it will take a number of budgets to address the issue, but that it does warrant attention. Employees in Ireland have some of the highest effective tax bills in the world as salary levels rise above the average wage. There are talent shortages globally, yet we know Irish SMEs need the best human capital to innovate, push new boundaries and capture new markets. The promise of a workable share option remuneration regime that allows SMEs to attract hard-found talented employees is welcome, but other measures such as a special assignee relief programme (Sarp) that is focused on SMEs must also be considered.

Innovation and development

Innovation and new product development are key to securing new customers and export markets. The importance of innovation is evident in the fact that it’s one of four essential pillars in Enterprise Ireland’s new export strategy for the Euro zone area. Ireland has an attractive R&D tax credit regime, but administration barriers are weighing heavily on its success in terms of the low take-up among SMEs. Irish Tax Institute research shows that 75 per cent of indigenous companies are aware of the R&D tax credit and 20 per cent have availed of it. However, of those that availed of it, 47 per cent said the process was difficult to prepare for and administer.

New EU free trade agreements, an expanding Euro zone economy and rapid growth in services as a share of world trade represent real opportunities for Ireland. However, we need tax policy and tax administration changes if we are to realise the plan. The IMF has been instructive, saying that we “must create a resilient, dynamic, innovative economy that is broader-based in its structure and less vulnerable”. We cannot control the external threats to our future, but what we can control, we should. No stone can be left unturned in our efforts to do so.

Olivia Buckley is communications director with the Irish Tax Institute