WE ARE only too aware of the imminent approach of Budget 2012, just as we were of Budget 2011. Persistent commentary advises us of the need to “balance Ireland’s books”.
In terms of tax policy to date, such budget measures and commentary have revolved around cutting tax reliefs and raising tax rates. While there are necessary cuts to be made, and we have all accepted that a certain amount has to be endured for Ireland to balance its books, progressive governments and progressive budgets have in actual fact taken the approach of taxing Ireland out of its recession. This, despite the fact that no country has ever managed to tax its way out of a recession.
Tax policy is a very powerful motivator. We need only look at how past tax incentives have influenced people to behave in a manner that was desired by government. Indeed, Ireland led the way in terms of the introduction of the very favourable 10 per cent corporation tax rate for certain industries and then the broadening of Ireland’s general corporate tax rate to 12.5 per cent to make Ireland a desirable low tax jurisdiction.
These kind of tax policies were fundamental in attracting highly paid, skilled employment for many thousands of people in Ireland.
It has quite rightly been identified that promoting a knowledge economy will attract further high paid employment in Ireland. However, other than stating this as an objective, where are the tax policies that will bring about this employment?
Although Ireland has had a tax exemption for income earned from patents – a policy which resulted in the location of intellectual property, and the associated jobs in Ireland – the government promptly abolished this relief last year resulting in a flight of intellectual property to other more favourable jurisdictions.
It is also accepted wisdom that the small and medium business (SME) sector will play a significant role in the recovery of the Irish economy, but again, where is the tax stimulus for this critical sector – a sector which currently employs over 655,000 people?
Currently, we have a bizarre situation where owner-managed businesses involved in the provision of consultancy services are subject to additional taxes where they retain profits in their companies – this despite the fact that working capital loans from banks are extremely difficult to access. Do we not want these companies to adopt a prudent approach and retain profits in their companies to safeguard jobs or to fund expansion?
Currently, Ireland’s Business Expansion Scheme (BES) is linked to areas such as hotel capital allowances, so while companies are trying to attract investment funds and BES has a limit of €150,000 relievable each year, we are then disallowing nearly half of this relief. Clearly this does not help stimulate investment in business.
Not only does taxation policy not incentivise entrepreneurs and small business in Ireland, they are taxed an additional 3 per cent compared to anyone else.
Ireland’s nearest competitor, the United Kingdom, allows its entrepreneurs an exemption of up to £5 million on disposals of their businesses to incentivise individuals to set up and grow companies to create employment. Ireland in turn looks to scrap any such relief.
Along with the pain we have all accepted must be suffered in the forthcoming budget, it would be encouraging to see some well thought-out tax policies designed to actually stimulate activity and create employment rather than simply an over-reliance on cutting relief’s and raising tax rates. In this way, we might actually assist the recovery of our economy through effective positive tax policy.
Darragh Kilbride is an executive committee member and tax spokesman for ACCA Ireland (Association of Chartered and Certified Accountants)