Comment The Minister for Finance, Mr McCreevy's affirmation in his Budget speech of the importance of low tax rates and targeted tax incentives to the development of our economy is significant and a welcome shot in the arm for the business community and tax practitioners.
This comes when several commentators have made a virtue of suggesting there is something inherently wrong with low tax rates and that legitimate reliance on tax incentives to promote specific, generally uneconomic, activities should be reviled as encompassing loopholes, tax avoidance and, at an extreme, some form of immorality. Nothing could be further from the truth.
Tax incentives have been the cornerstone of our economic development and, by extension, our social development for more than 50 years. Export sales relief (providing tax exemption to exporters), then a 10 per cent tax rate for manufacturing, and now a 12.5 per cent standard corporate tax rate have been the primary reasons why 1,100 international companies have located substantial operations in the Republic.
Firms such as Intel, HP, Dell, Wyeth Medica and Microsoft legitimately avail of the State's low tax rates and, in the process, contribute more than 130,000 well-paid jobs and hundreds of millions in corporation tax, VAT, PAYE and PRSI to the Exchequer every year.
The Minister's assertion that the Government "has no intention" of going down the high direct tax route, now or in the future, and his recognition of the key role played by low tax rates and tax incentives in job creation, social inclusion and economic development provides welcome balance to the debate.
Targeted tax incentives have also been a key driver of economic activity in the property and infrastructure sectors. Take the International Financial Services Centre (IFSC). Tax incentives in the IFSC have led directly to the development of more than two million square feet of prime office space, which is occupied by 430 financial services businesses, employing more than 10,700 people and contributing more than €700 million to the Exchequer annually in corporation tax alone. Temple Bar has been similarly rejuvenated by tax incentives.
Across the length and breadth of the State, tax incentives have stimulated property developments that would otherwise have been uneconomic and that have since contributed more in VAT, income tax and levies to the Exchequer than the tax cost of the incentives that put them there. The Square in Tallaght, Dublin, is a good example of development driven by tax incentives and providing infrastructure for a community that, until 1990, had been economically and socially starved.
The benefit of targeted tax incentives has not been unique to the property sector. Tax exemption for stallion fees has been pivotal in developing Ireland as the leading bloodstock country in the world. Incentives for film production have created a vibrant, highly skilled film sector over the past decade.
All these initiatives have created jobs and economic prosperity. We should be proud of Mr McCreevy and his predecessors for having the foresight (well before their international peers) to realise the extent to which tax incentives could stimulate sustained economic development.
It is hardly surprising that it is those on higher incomes who have availed of these incentives to reduce their tax. Given the scale of many of the projects that the Government sought to encourage through urban renewal incentives, it is incomprehensible to berate so-called high earners, who took up the gauntlet thrown down by Government of financing much needed development, for having legitimately reduced their tax, within the law, in the process.
The Minister gave life to his belief in targeted tax incentives by introducing new measures in Wednesday's Budget to enhance Ireland's competitiveness in attracting research and development activities, and holding company activities to Ireland.
Both of these tax incentives are significant in their own right. However, it is their role as part of a comprehensive tax package alongside low corporate tax rates, our attractive tax treaty network and, now, a clear commitment to a low-tax environment for business that will serve us well in the future. The Minister is to be applauded for his commitment to low taxes.
David Kennedy is a tax partner in KPMG. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG Ireland.
