Report findings that the bloodstock industry is actually a net tax contributor by a significant margin will be carefully scrutinised, writes Barry O'Halloran

An economic consultants' report published this week calculates that the thoroughbred breeding industry is worth around €330 million a year to the Irish economy.

But the two findings in the report, compiled by Indecon, that are set to be scrutinised most closely are that the controversial tax exemption for profits from stallion stud fees is costing the Exchequer €3 million a year in foregone tax, while the racehorse breeding industry as a whole contributes €37.5 million in tax. On the basis of these figures, the industry is a net contributor of tax to the State's coffers to the tune of €34.5 million.

Indecon estimates that the average nomination fee, paid when a stallion successfully impregnates a mare, is €8,481. The figure is based on returns from the 2002 breeding season. Overall, its highest calculation of gross stallion fee income in the State is €85.5 million.

To work out the tax liability against this, it subtracts the cost of maintaining the animals at stud, insuring them and depreciation, which is rapid given the fact that, as assets, stallions have a relatively short lifespan of around 20 years. At the end of this, it is left with a total for the industry of €3 million.

According to Indecon, the industry generates most money from the sale of stock. Last year, more than 10,000 thoroughbred foals were born in the Republic. This was 42 per cent of the total European production and ranks Ireland as the third-largest global producer after the US and Australia, respectively.

Between 1995 and 2002, the value of thoroughbred sales at auction in the State grew from more than €40 million to €110 million. In 2002, between domestic and overseas auctions and private sales, Irish horses fetched a total of €250 million. The profits from these sales are fully taxable.

Three leading industry bodies, Horse Racing Ireland (HRI), the Irish Thoroughbred Breeders' Association (ITBA), which represents the breeders who own the mares, and the Irish European Breeders' Fund (IEBF), which represents the country's 89 stallion farms, commissioned the report.

Launching the report, HRI chairman Mr Denis Brosnan argued this week that the exemption draws top-class international stallions to the State, which draws breeders and their broodmares. A total of 390 stallions stand here, supporting a domestic population of 14,700 mares, supplemented annually by almost 3,000 foreign-based horses who come here to be covered during the breeding season.

HRI chief executive Mr Brian Kavanagh points out that a high proportion of the top-class horses standing here have never raced in the Republic, but their owners chose to locate them here because of the tax break.

"Our point is that, if the exemption goes, the owners could choose to locate them in other countries, with an inevitable knock-on effect on the industry here," he says.

The fear is not so much that top sires such as Sadlers Wells, which stands at Mr John Magnier's controlled Coolmore Stud in Tipperary, or Daylami, which is at the Aga Kahn's Gilltown Stud in Kildare, will up and leave. Mr Kavanagh says the concern is that there will be nothing to replace them when their careers end.

Indecon states that "increasingly, the bloodstock business is competing with a number of locations seeking to develop a bloodstock industry".

Mr Brosnan rates Australia as the main threat to the Republic. It has accelerated allowances against fees, which allow owners to write off their value over four years. It is also positioned close to markets with growing demand for racehorses. The UK, France and the US are also competitors.

For years, the US state of Kentucky has dominated American horse breeding. But one of its most influential figures, Mr John Gaines, founder of the prestigious Breeders' Cup race meeting and former stud farm owner, told The Irish Times that the state is in danger of losing its status, and a $4 billion (€3.3 billion) contribution to its gross domestic product (GDP). "We have lost over 230 stallions," he said. "Eight years ago, we had over 600, now we have 386."

The reason is that states such as California, New York and Florida are offering tax concessions and incentives to breeders and stallion owners, who are beginning to locate their horses there.

On the basis that they drive foal production, Mr Gaines estimated that each stallion added $3.6 million each year to Kentucky's GDP, and argued that they were the equine equivalent of factories. "What do you think would happen if we lost 240 factories?" he asked.

Mr Gaines and former Kentucky governor Mr Brereton C Jones, owner of Airdrie Stud, are leading a new organisation called Kentucky Equine Education Partnership (KEEP). This is designed to bring Kentucky's entire equine industry together to launch a campaign to garner support across the state for the introduction of incentives to help it compete with other parts of the US.

According to Mr Jones, this will mean loosening the state's restrictive gambling laws to legalise video gaming at racetracks, the proceeds of which will be used to fund bonus prize funds for breeders of Kentucky-bred horses that win races in the state. New York, Florida and California already use this system but, to qualify, the horses have to be born in the particular states.

Both Mr Gaines and Mr Jones, say they would like a stallion stud fee tax break.

The British and French industries, which benefit from some capital allowances and breeders' incentives, are also pushing for something similar.

In the Republic, Labour leader Mr Pat Rabbitte, one of the stallion incentive's most vocal critics, says he does not believe that the industry here will suffer if it has to face a 12.5 per cent corporate tax rate. "This is a well established and competitive industry," he says. "I do not accept that a moderate tax regime, like the corporate rate, will result in all these stallions leaving the country."

He also says that he is sceptical of the €3 million tax foregone calculation.

The Revenue Commissioners have begun their own review of the system, but they are not likely to complete this before next year, according to a spokesman. It is unlikely that anything will happen before that point at least.