| What do we want? We want jobs! We want continued economic growth! Even in a global economic slowdown, there is much mobile international investment. The budget should redouble efforts to attract it to Ireland. |
Our economic development since mid 1950s has been based on having a taxation system which is attractive for multinational investment. It is unfortunately possible that the next budget will be framed with an eye to fiscal rectitude primarily. That would be to take the eye off the ball. The goal has to be to maintain our economic growth. That requires continual vigilance to ensure that our tax system presents no obstacles to inward investment.
Fiscal rectitude does not have to be purchased at the cost of economic stagnation. There are steps that can be taken that would improve economic investment over the next few years without significant cost in terms of tax revenues. The payback in terms of PAYE, PRSI and VAT could be rapid and substantial.
Consider the following:
Location for holding companies: Almost every fellow-member of the EU has introduced special tax regimes designed to make them attractive as a location for holding companies of multinationals. Typically these are aimed at regional holding companies ie European head offices. Which country in Europe just isn’t at the races? Ireland! We attract more US investment than most of our neighbours in the EU but stubbornly refuse to be a holding company location.
To succeed in this area we need to abolish a number of taxes that raise virtually no revenue. These are the taxes on dividends from substantial overseas shareholdings (eg subsidiaries) and the tax on capital gains on the disposal of those subsidiaries.
Before anyone says ‘more tax breaks for multinationals!’ bear in mind that no multinational is likely to repatriate any dividends to Ireland unless they are fully covered by foreign tax credits and thus yield no tax revenue here. Nor is any multinational likely to be so ill advised as to dispose of a foreign subsidiary in a fashion that gives rise to capital gains tax in Ireland. Taxation in this area yields nothing but sterilises our prospects as a holding company location.
Hi tech investment: Amazingly, after decades of focusing on companies who are at the cutting edge of technology as the source of inward investment, we deny tax write-offs for expenditure on acquiring know-how from other group companies. In contrast, our principal competitor for such inward investment, the UK, has no such inhibitions. If a multinational wants to set up something more sophisticated than a screwdriver operation in Ireland, it will probably have to move existing technology out of another country. Typically that other country imposes a tax on the shift of the technology, based on its current market value. When Ireland does not give a tax deduction to balance in part that foreign tax charge, it makes the cost of investment in Ireland expensive, compared to the cost of investing in, say, the UK.
We do allow a deduction for the cost of patented know-how, but deny it for other forms of know-how. Where is the logic in this? This area should be tackled if we want to continue to be a knowledge-based economy with high value added, yielding commensurately high income.
Interest withholding taxes: The financial services sector has been a major force in Ireland’s economic growth in the last decade. While that growth was concentrated in the IFSC where a special regime applied, it was possible to overlook the impact of interest withholding taxes on Ireland’s attraction as a financial services location. With the fade out of the IFSC regime this area is now in sharp focus. Withholding taxes on interest payments probably do yield some revenue to the State. Here the Minister for Finance has to consider a trade-off. Does he want his relatively small take on withholding taxes on interest, or would he prefer a potentially more lucrative inflow of PAYE and PRSI from the financial services sector? Our present inadequate patchwork of reliefs from interest withholding taxes just will not do for a modern financial services sector.
Capital duty: Capital duty does yield revenue to the State. But we are out of step with the rest of our EU partners in levying such duty and run contrary to preferred EU policy in that respect. Capital duty represents a substantial up-front cost on new investment entering the country. This is particularly so in the case of the financial services sector. Again the Minister has to consider whether his safe trickle of capital duty is worth risking against the possibility of the greater tax flow that would follow from increased growth.
Gift and inheritance taxes: These may not sound like items relevant to inward investment. But with inward investment comes seconded expatriates and overseas workers of all types who are vital to providing the range of skills inward investment requires. Our current tax rules will expose such expatriates to the full burden of gift taxes and inheritances taxes both on what they receive and on what they give, after five years’ residence, starting in 2004.
This ‘shot in the foot’ was administered to ourselves by the Finance Act 1999. We have just over a year to reverse this taxation move, which, once it takes effect, will prove a major hurdle to the attraction of inward investment.
Lastly, the Minister should resist temptation! With a need for revenue, the possibility of lifting the ceiling on employees PRSI may seem tempting. But a further tax on jobs is hardly what the economy needs right now. It is the economy that provides the Minister with taxes. Shoot the economy, and there will be no taxes, no matter what the Finance Acts may say. |
Conor O’Brien is a tax partner with KPMG.
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| Article appeared in the September 2002 issue.
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