Friday 23 February 2018

Richard Curran: Government must heed EU warnings on tax and spend balancing act

Taoiseach Leo Varadkar could have to say goodbye to his plans to ease the tax burden on families if they fall foul of European Union rules
Taoiseach Leo Varadkar could have to say goodbye to his plans to ease the tax burden on families if they fall foul of European Union rules
Richard Curran

Richard Curran

Ireland is trying to have its cake and eat it, seems to be a key message from the latest European Commission report on the economy. The commission's latest post-programme surveillance report highlights a number of things the Government is either getting wrong or may be about to get wrong.

This includes measures which narrow our tax base, like the Help-To-Buy scheme, or the financial implications of scrapping water charges. Against a backdrop of Taoiseach Leo Varadkar talking about easing the tax burden on hard-working families, the commission states that Ireland may breach EU fiscal rules this year after deviating from the adjustment path with higher spending.

The commission wants us to stick with the USC and not erode the tax base any further.

It doesn't look like a very good score card result, when compared to the IMF report published recently which seemed to say everything was going pretty nicely. The IMF pointed to some external risks like Brexit but the only big issues it highlighted that are within the government's control, were legacy debt issues and housing.

The commission has decided to have a bit more of a go at our economic position and Government decisions. For example, it highlights the continued 9pc lower Vat rate for the tourism and hospitality sector. Originally introduced for an industry in crisis, the situation looks quite different now. Profits of hotel groups like Dalata are rising. During the week it was reported that Dromoland Castle had an 18pc surge in profits last year. "The tourism industry is just incredible right now. We are having a great season", said Dromoland general manager Mark Nolan. Passenger numbers at Dublin Airport are at record levels, so too are visitor numbers.

Anyone trying to book a B&B in Dublin recently, never mind a hotel, will wonder about the notion of hospitality being a sector in crisis. In fact, Pat McCann, chief executive of Dalata, the country's biggest hotel chain, said recently that prices in Dublin needed to increase further, in order to bring it more into line with other European capital cities.

The problem is that many smaller hospitality businesses, like coffee shops, restaurants and family hotels, in some regions of the country might not be finding the going so good. I am not aware that the government has ever made geographical distinctions on Vat rates for different parts of the country.

But now might be a good time to look at it. If we can have rent controls for some towns and cities, perhaps we could have lower Vat rates in some areas, where the sector might still need a boost. Of course our friends in Brussels, who take a dim view of state aid in regions, might have something to say about that too.

So far so good for 'Joe Malone' investors in AIB flotation

Retail investors should be reasonably pleased with the early days of trading in AIB since its IPO. Individual investors put in an average of €46,150 into the IPO. There were about 6,500 of them. I am reluctant to refer to them as 'Joe Soaps', because with €50,000 to invest in an IPO, they are more "Jo Malone" than "Joe Soap".

But "Joe Malone" is up about €4,400 on the average investment amount or roughly 9.5pc with the shares trading around €4.82. It doesn't compare so well with the early days of other State flotations. Anyone who sold their Eircom float shares within hours of opening made a return of around 23pc. Those who held on did not do so well.

After the Aer Lingus flotation in September 2006, the shares had risen from €2.20 to about €2.38. Then Ryanair came along, within about eight days of the IPO, and made a bid. The stock climbed to €2.95 giving punters who sold a profit of around 34pc.

Some people baulked at the idea of investors having to put in a minimum of €10,000 in the AIB flotation. However, the same rule applied to Aer Lingus in 2006. Given that 80pc of investors who participated in the AIB IPO put in orders for €50,000 worth of shares, it shows there are still people out there with plenty of money to invest.

The question is where will the shares go from here? Mortgage data released during the week for May points to solid increases in mortgage approvals which were up 45pc and the new mortgage lending market is expected to hit around €7.4bn this year. Davy Stockbrokers believe the mortgage market could hit €12.8bn by 2020.

This is good news for AIB, given its sizeable share of a mortgage market that lacks serious competition. Unlike Eircom or Aer Lingus, the 'Joe Malones' will probably hang on for longer rather than take their 10pc gains right now.

Targeted tax policies could deliver more homegrown success stories

US multinationals are dominant on the Irish economic landscape. It is great to have them, but perhaps we need to think a lot more about how we can encourage indigenous Irish exporting firms to fulfil their potential. That is the central message of a new report by the Irish Tax Institute, called A Future Tax Strategy to Grow Irish Indigenous Exports.

A relatively small number of very large firms are paying most of the corporation tax, benefiting most from tax incentives, and just 100 firms here account for 70pc of the R&D spend. It's a major concentration of activity and therefore risk, if anything goes wrong.

With Brexit coming, indigenous firms, and SMEs may need a greater hand from the State and from more focused tax policies in particular to grow. The report highlights several areas where SMEs cannot even avail of the tax breaks that are available to larger mainly foreign-owned entities.

One area is attracting quality talent to their firms. High personal tax rates and a lack of a viable share option scheme are two such challenges. When Irish firms want to attract an engineer or an IT specialist from abroad they are competing with multinationals.

Tax reliefs are available for bringing in the specialist from abroad if you are a foreign multinational but not if you are an Irish SME. Smaller Irish IT firms might want to offer share options to employees but they will be hit with huge income tax bills when the stock goes up in value, followed by capital gains tax when they sell.

I have heard Irish software companies recount stories of employees actually being lumbered with share options because they had to borrow money to pay the income tax bill on them.

This week the European Commission approved Swedish tax breaks for employee share options. The scheme will see employees of innovative Swedish companies benefit from income tax relief when exercising share options. Why not do something similar here?

In a briefing on the report, the Irish Tax Institute's director of communications Olivia Buckley and policy director Cora O'Brien also pointed to the 33pc capital gains tax angel investors have to pay on gains from often high-risk investments in startups.

To avail of the lower CGT rate, you must be effectively an owner manager or spend a high percentage of your time working for that business.

Department of Finance officials might take the view that angel investors are already relatively wealthy, so why should we have tax measures which reduce their tax bill?

But in reality, angel investors are going to put their money somewhere. They might buy an office block, with tax breaks attached, that will create very little wider economic value. They might buy shares in Apple or they might take a punt on an Irish company that could become the new Apple.

In the post-Brexit battle for global talent, investment and market share, indigenous companies will need more targeted tax policies.

Sunday Indo Business

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