High personal taxes force out the great and the good
The levels of income tax high earners have to pay here is a barrier to attracting top talent, writes Roisin Burke
AS MESSAGES go, this one was pretty blunt and to the point. "U pay tax 2" was the line printed on the giant balloon raised by protesters at Glastonbury when U2 performed onstage, before the security guards jumped in to burst their bubble. It seems that wherever you turn, high earners and their taxes are in the spotlight.
More modestly high-earning individuals than U2 pay income tax at a premium rate in Ireland, shelling out more than in any of the world's big powerhouse economies, new figures suggest.
International accountancy consultancy UHY says its survey shows those earning €140,000 in Ireland have the second highest tax burdens of any major economy.
Its research looked at 19 countries, including the G8 big economies like the US, Britain, Germany and France and also at key emerging economies like India and Brazil, and calculated the net take-home pay after tax.
Funnily enough, only in U2's royalties tax haven, the Netherlands, does the exchequer grab more tax from those earning €140,000 than Ireland. In Ireland, someone who earns just under €140,000 will pay €62,317 of that in tax; In the US they'll pay close to half that at €34,000. In Germany it's €50,683.
But the Netherlands and other high-tax countries like Sweden provide substantial individual tax sweeteners to attract skilled workers and executives. Ireland has a limited scheme, detailed below.
Some are asking if high tax on high earners -- and therefore top talent -- is stymieing competitiveness by deterring multinationals looking to locate in Ireland.
"Companies look at personal tax rates when choosing where to locate," says UHY partner Alan Farrelly. "If the tax burden is too high, they may struggle to attract the necessary talent.
"Many high earners will be highly skilled and they are usually very mobile. Ireland risks a brain drain if high earners are taxed significantly more than in competitor countries," he warns.
"The Government is resistant to the idea of increasing corporate tax rates, but with austerity measures on the horizon it will need to consider whether high earners can shoulder a greater tax burden without damaging the competitiveness of the economy."
Two senior sources at Irish multinationals who won't comment publicly on a host country's income tax policy, privately told the Sunday Independent that high tax on senior executives makes head hunting top people to come here harder.
Speaking in his capacity as American Chamber of Commerce president, the boss of leading US biotech giant Medtronic Gerry Kilcommins says income tax is a key part of the mix of selling points for the 600 US companies operating here.
The "young educated workforce, pro-business culture and competitive corporate tax" are factors, but, Kilcommins adds, "A further element of Ireland's competitiveness is its personal tax regime.
"For Ireland to be an attractive location for FDI businesses, it equally needs to be attractive to individuals, as we need to be able to entice skills and talents, as well as key decision-making senior executives, to locate in Ireland," he says.
"Where there is a significant difference between the taxes levied on an executive working in Ireland and where they originate, this makes it more difficult to attract this talent to relocate to Ireland.
"In many cases employers have to compensate for the potential loss in earnings. This increases the cost burden on employers, but equally makes labour more expensive in Ireland when compared to other countries against whom we compete for FDI.
"With an effective top rate of tax of 52 per cent, the level of taxation on high earners in Ireland is out of line with jurisdictions with which we compete for investment, such as Singapore and the US.
"For multinationals to continue to thrive and grow in Ireland we need to be able to attract highly skilled people from around the world. Any difficulty in doing this represents a competitiveness challenge for Ireland which will need to be overcome."
It's not just the pharma giants or tech behemoths that think at length about this when hunting for a new home in Ireland. And while it's not a dealbreaker, high income tax is an influencer for fledgling tech innovators, says Philip Flynn, CEO of Digital Hub Development Agency, that has been a home for tech successes like Havok and Cryptologic.
"Senior executives and in some cases original founders or owners are likely to be involved in making or influencing a company's decision to move to or set up in a new location and, obviously, a high personal tax burden might be an issue for them individually," he says.
"The corporate decision to locate in Ireland will generally be made on the basis of what is best for the company overall, rather than what is best for individuals within the company. However, the decision does have to take account of the difficulty in attracting the requisite skills and talent for the company in question -- if the tax system is a deterrent to that, it will be an issue for the company.
"We already know there is a skills issue for existing multinational companies in Ireland for our newer and growing indigenous digital media and tech companies. The skills in question here are all very internationally mobile and generally high-earning, because of desirability and demand. So, basically, individuals with those much-sought-after skills may choose to live and work outside of Ireland to avoid high rates of income tax. But it has to be said that individuals with the luxury of such choice also take other lifestyle factors into account when choosing where to live and work. So it's a very delicate balance that has to be managed."
The country's chief FDI enticer, the IDA's Barry O'Leary, is highly conscious of personal tax as a factor, but argues that it's far from the only one.
"The tax burden for senior executives and all other employees is one of the many components multinationals consider when selecting a location, and in Ireland the level of taxation for high earners has increased due to the broadening of the tax base," he acknowledges. But it's not something that would keep a Twitter or a Skype out of Ireland, he says.
"The IDA's experience has been that the tax burden in Ireland for high paid executives has not deterred investment here, with many of the world's leading companies announcing key strategic investments in the first six months of 2011, bringing with them significant amounts of talent," he adds.
O'Leary and Flynn both highlight the tax incentives for top people coming here that have been enhanced and expanded.
"In January of last year the conditions attaching to the Special Assignment Relief Programme were amended to further incentivise and encourage key overseas talent, particularly those senior executives in high-skilled disciplines, to locate in Ireland," O'Leary points out.
"It's also important to note that unlike many other countries, the US for example, there is no property tax in Ireland, presenting senior executives with a considerable saving. Also, European senior executives in Ireland do not pay university fees, which otherwise would be very significant."
O'Leary makes a salient point here. A top exec relocating to Ireland from say, Google's London office, may have paid less income tax in Britain, but she'll have paid council tax and water rates to the tune of circa €6,000, possibly school fees in the region of €10,000 annually per child, and university fees. Ireland squares up relatively well when seen in that light.
Sunday Indo Business