Our Home-Grown Employers Need Tax Break As Well
11 October 2013
Posted by: Author: Darragh Kilbride
Author: Darragh Kilbride (Irish Independent)
THERE has been much discussion recently on Ireland's tax regime, both nationally and internationally, where the focus has been on Ireland's favourable corporate tax rate and the methods available to corporations located in Ireland to reduce their overall corporate tax bill.
It is interesting to note the attention Ireland, in particular, has drawn in this debate. No doubt this is due to the open and transparent tax regime that Ireland operates as compared to some other jurisdictions.
Many EU countries have similarly low corporate tax regimes and tax lowering legislation – (they are just a little bit more opaque about it).
Malta operates a headline rate of 35pc but actually has an effective corporate tax rate of just 5pc. France has a rate of 33pc but this can be reduced as low as 9pc. The UK has been consistently lowering its corporate tax rate over the last number of years.
Fortunately Ireland had the vision many years ago to introduce a 10pc corporate tax rate for certain targeted sectors and then to move to a 12.5pc corporate tax rate for all companies. We were well ahead of the game then. We reaped the rewards with these companies arriving and creating well-paid employment in huge numbers. The exchequer too benefited with taxes flowing in as a result of the employment created.
So where does this leave us and what does it all mean? Well it leaves us in a much more competitive space if we want to tackle the number of unemployed in the country. The fact that other jurisdictions are now competing with us with their tax regimes is a double edged sword. It means we need to fight to attract more businesses to Ireland but it also means we need to fight to keep our Irish businesses located here.
Just as our tax regime attracts companies to locate here, which increases employment and tax receipts, so too are other countries now trying to attract our companies.
At government level, we seem to have recognised that the Irish SME sector is crucial to economic recovery and that much employment will come from incentivising this sector. Many pronouncements have been made of providing support and encouragement to this sector to stimulate employment. But how does our tax policy measure up to these stated intentions?
Well that depends on what sector you are looking at. If you are looking at attracting foreign companies here, we have strongly committed ourselves to the 12.5pc company rate which is just as it should be. We have also introduced some additional favourable reliefs in the form of the FED (a relief for individuals involved in exporting to a number of selected countries) and the extension of the R&D credit to individuals who spend 50pc of their time on R&D activities.
But here is where the disparity starts to emerge. It seems that businesses in one of the key sectors we are looking to incentivise are becoming second class citizens in their own country. The self employed owner managers of businesses are not only not incentivised to continue to locate their businesses here and create employment; they are actually not even on a level playing field.
When you compare the self employed to those who are employed, it makes some very stark reading indeed. At the lower end of the earnings spectrum those in self employment can pay up to six times as much tax as the people they employ on the same earnings!
Not only do we not support and encourage an entrepreneurial culture in this country, the Government has gone as far as to introduce an entrepreneurs tax.
Most entrepreneurs have to put their capital at risk to start an enterprise and in many instances in the SME sector, are the last to be paid. Ireland's answer to incentivising this group of people to create further employment: – make them pay an extra 3pc in tax if they are a high earner, and make them pay extra PRSI at 4pc if they are low earner.
Not only that, they get to pay 90pc of their taxes before they've even earned their money!
Domestically, the discussion around Ireland's tax policy has gathered pace as budget day looms. Given the necessity to locate a further three billion to adhere to financial commitments under the bailout regime, the question naturally arises as to the balance between further cuts in expenditure or tax increases to achieve this target. This needs to be a measured discussion, certainly one where fundamental tax reform needs to be introduced to support the domestic SME sector. Just as there is a general acceptance that foreign companies locating in Ireland will not provide all of the answer to the unemployment issues we are currently experiencing, so too there needs to be an acceptance that we need to, at the very least, keep the indigenous owner-managed business on an equal footing to those they employ. But how about incentivising them just as we incentivise foreign companies?
Everything about Ireland's tax policy should have at its forefront, the intention of capturing and creating employment in this country. Everything. The game to lure companies is well and truly on. So too is the game to keep what is ours here. Now our government just needs to decide whether it is going to really play or not.
Darragh Kilbride is a director of Kilbride Consulting and Tax Spokesperson for ACCA Ireland (Association of Chartered Certified Accountants)
This article first appeared in independent.ie.