Incentivising Investment: The Tax Landscape as a Lever

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How could Ireland’s taxation system work harder to attract investment in ICT post Brexit?

The Irish ICT (information and communications technology) sector is one of the fastest growing in the world. There are currently 105,000 people working in the sector, a 40% rise since 2010, and exports now exceed €70bn per annum.

But for the British Irish Chamber of Commerce, changes to the tax system are urgently needed if Ireland is to attract entrepreneurs and start-ups and encourage the development of homegrown talent after Brexit.

“One of the big ambitions for Ireland is to grow a more diversified indigenous sector and become more export focused,” says Olivia Buckley, communications director at the Irish Tax Institute. “The pillars you need for that are talent – meaning expertise and the skills to develop diversification; innovation, for which you need R&D; and finance, including capital investment.”

The key then is to look at tax policies that ensure the growing environment stays attractive. “We have very high capital gains tax (CGT) – 33%, higher than the UK and even higher than Germany.” This is “preventing businesses from reaching their full potential in terms of getting investment in, and the necessary buying and selling involved in expanding businesses. It needs to be reduced, particularly given the challenges we are going to face after Brexit.”

For Buckley, Ireland also needs more third-party investors in business, particularly angel investors. “They bring the experience and expertise that our indigenous businesses need to scale up to become export companies – as well, of course, as finance.” Ireland does not have the number of angel investors seen in Germany, France or Sweden, for example, “and it would make a huge difference if our tax regime was attractive to them”.

 

Supporting innovation

“There’s an ongoing conversation being had about tax because as the tech sector becomes an increasingly important part of the global economy, the way the tax system is organised needs to evolve,” says Giles Derrington, head of policy for European exit at techUK. “You need a tax structure that supports and encourages innovation.”

For instance, Derrington says, “traditionally you have tax incentives on capital expenditure. But as technology moves to the cloud and subscription-based models, it’s important that tax structures change to keep pace – the things that tax reductions are incentivising need to be the things you want to encourage and up to date, rather than being stuck in old ways of thinking.”

This can actually be quite hard to do, Derrington argues, “especially with the view of digitising the rest of the economy. The important question to ask is: what are our tax objectives? If they don’t keep evolving as technology does, you can damage productivity and make it harder to put money into recruitment or development of products.”

 

Appealing to talent

“Worldwide, there’s a big race on for talent, particularly skills in science and ICT,” Buckley says. “In services, engineering and design and software skills, companies are looking to get the same kind of people. We need to be attractive to them – and our personal tax regime is important when people are weighing up the salaries of competing offers and looking decide where to base themselves. At the moment, high personal taxes are a significant disincentive.”

 

“There’s been a huge amount of work on a strategy for Ireland’s future being export led. But the ambitious policies should be matched by corresponding tax policies”

Olivia Buckley, communications director, Irish Tax Institute

 

Does Buckley see any sign that the desired changes are on their way? “We did see some changes to the personal tax system in the recent Budget. The entry point to the higher rate of income tax has been raised, so there are benefits for middle-income people and there have also been tax cuts at the lower- to middle-income rates.” Tax policies are therefore “moving in the right direction, but a lot more is needed”.

 

SMEs and entrepreneurs

The British Irish Chamber of Commerce argues that while Ireland’s low corporate tax rate has encouraged inward investment from major ICT players (Google, Facebook and Microsoft being headquartered here), the CGT rate “acts as a disincentive to investment in indigenous enterprises”, says Buckley.

However, the presence of major players does not make life harder for start-ups – rather the reverse. “You can develop a hub if you have major players and this puts Ireland in a very strong position,” says Derrington. “The question is what can the Irish government do to support the smaller companies – skills, planning, and making sure the immigration situation is attractive to tech talent from outside the country?” For Derrington, tech workers tend to be “young, more internationally focused and wanting to know there’s a good culture for them to develop and thrive in. Dublin is very well placed for this.”

One of the key tax incentives is the Employment and Investment Incentive (EII). “This is the main income tax incentive available to people investing in Irish business,” Buckley says. “It’s aimed mainly at supporting early-stage business and can mitigate risk for investors in these businesses, including family, friends and angel investors.”

 

Tech ahead

Why is changing the current tax landscape so relevant to the technology sector?

“Tech is a heavily global sector,” says Derrington. “It’s not interested in borders; it wants to collaborate.” By their nature, many tech companies can take a long time to reach the tipping point of turning a profit. “This means you need investors with deep pockets and patience.” Certainly, without a favourable tax landscape, companies are going to look elsewhere, all other things being equal.

Finally, collaboration is key when looking ahead. “There has been a huge amount of work on the strategy for the future of Ireland being export led and bodies are working well together,” Buckley says. “But the ambitious policies need to be matched by corresponding tax policies to enable companies to grow.”

 

What the British Irish Chamber of Commerce wants to see: key recommendations to change Ireland’s tax landscape

  • Reduce the marginal rate of taxation. Its current high rate acts as a disincentive for prospective foreign tech employees considering locating in Ireland.
  • Reform capital gains tax. Reduce CGT for entrepreneurs to recognise the distinction between speculative gains and innovative investments.
  • Expand Startup Refunds for Entrepreneurs (SURE). Increase investment limit from €100,000 to €250,000 and also expand the scheme to cover investments by the self-employed.
  • Expand the EII. Increase the maximum cap from €150,000 to €500,000 per annum and expand the scheme to include investments in venture capital funds by high-net-worth individuals and corporate investors.


By ContentLive

 

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