Agencies overestimating value of FDI tax benefit
IDA and Enterprise Ireland told to assess projects based on 9.8pc corporate rate
Enterprise Ireland and the IDA have been overestimating the rate of corporation tax paid by companies they assess for investment by almost 28pc, according to a new report prepared for the Department of Business, Enterprise and Innovation.
The review by consultancy group Indecon of the so-called Economic Appraisal Model (EAM) used by the investment agencies in their grant-decision process has also said that the infrastructure deficit needs to be considered when assessing job creation in the greater Dublin region.
The Economic Appraisal Model attempts to calculate the costs and benefits of projects regardless of the scale of the State support.
The aim is to measure value for money on behalf of the exchequer.
The report also found that congestion and housing shortages are so bad in Dublin that each new job created in the region as a result of Enterprise Ireland or IDA R&D support should be assumed to incur a €2,500 cost per year to the capital's economy, according to Indecon, which has made a number of recommendations to the Department on how the so-called EAM should be improved.
The report said that constraints on infrastructure such as housing, and office developments inevitably result in higher prices and can result in the need for significant increased public spending.
The Indecon report recommended adding a cost of €5,000 per employee per year, but said that taking into account the net increase in the labour force in the greater Dublin region when assessing projects, the amount could be reduced to €2,500 per employee per year.
The report said that the €2,500 cost assumption for projects being assessed by the IDA should only apply to R&D grants it's considering in Dublin, as other IDA projects for Dublin are not grant-aided.
The Indecon study also noted that in assessing the costs and benefits of new projects, Enterprise Ireland and the IDA have been doing so based on the assumption that client firms would pay a 12.5pc corporation tax rate - the statutory rate for trading income.
"Department of Finance research indicates a range of effective corporation tax rates in Ireland of between 8.4pc and 10.4pc," noted Indecon. "The Comptroller Auditor General has estimated an average effective tax of 9.8pc for Ireland. The difference between the statutory and the effective rate is due to factors such as R&D credit.
"We note the costs of these credits are not included in the EAM."
Indecon has recommended that the two State agencies should assess projects based on the assumption of a 9.8pc corporation tax rate.
"We are working with the Department of Business Enterprise and Innovation to update our economic model to take into account the recommended changes and will pilot it in Q1 2019," said the IDA.
The Department of Business, Enterprise and Innovation said it will also pilot the recommendations, as will Enterprise Ireland.