The skills shortage "choking growth" in the Irish software industry can be solved by modifying tax laws on employee share option schemes, according to a position paper issued by the Irish Software Association (ISA) yesterday.

"It is clear that without change, a competitive knowledge-based industry will not survive in Ireland," said Mr Gerry Jones, chairman of the ISA which represents more than 50 per cent of indigenous and multinational software companies in the Republic.

The ISA report says action is needed on a national level to reduce the loss to competitiveness caused by wage inflation "which is rising by 15 per cent in average cases and significantly higher for key staff" and 20 per cent staff turnover rates.

According to the ISA, uncompetitiveness is already manifesting itself in the increasing tendency for companies to subcontract abroad. A recent survey carried out by Computer Staff Recruitment found that software companies currently outsource £57 million (€72.4 million) of business abroad. This represents a loss of up to 1,000 jobs to the economy to cheaper locations such as Poland, the Philippines and Northern Ireland, according to the report. Like many sectors of the economy the software industry is finding it increasingly difficult to achieve its targets because of the rapid pace of growth and the knock-on effects in finding and keeping personnel.

The software sector employs 24,000 and the ISA's ambition is to almost double software employment in the State to 40,000 by 2002, says the report. It also points out that the increasingly uncompetitive environment is threatening the Government's goal of creating "a knowledge-based economy and an e-commerce centre here.

In recent years the Republic has become the "second-largest producer of packaged software in the world, after the United States" and 40 per cent of all technology-related foreign direct investment to Europe has come to the Republic, says the report.

The ISA recommends a lowering of tax to 20 per cent on gains made from share options.

"Just as the taxation system now rewards risk-takers through lower capital gains on private share ownership, so should it encourage risk taking through a 20 per cent tax rate on options," said Mr Jones. According to the report, the current "unfavorable" income tax regime of 46 per cent tax on employee share option schemes "is severely hampering" their effectiveness in the Republic. The introduction of the 20 per cent rate would tackle several problems currently facing the software sector in one swoop and put the industry on a better footing to compete in the global software industry which is expected "to exceed $1,000 billion in value in the next 18 months. "We must restructure remuneration of staff so as to reward innovation and commitment and to encourage longer tenure in companies," said Mr Jones.

He added: "A 20 per cent rate of taxation on share options would put Ireland on the global map in terms of employees in the same way that the 10 per cent corporation tax did for multinational corporations."