Comment: Industry wants to test Cowen’s mettle

1 Dec 2004

Both sides of Ireland’s technology sector — indigenous and multinational — want things for Christmas but if they think the Finance Minister Brian Cowen TD (pictured) is likely to don a Santa suit they’ve got another think coming.

Talk of a budget surplus for the first time in a number of years is great stuff, but the demands of the technology sector, no matter how politely put, are in danger of being eclipsed by more urgent demands on government money, most particularly in the areas of health and education.

Nevertheless, the requests by the technology sector, largely in the form of IBEC-backed bodies ICT Ireland (primarily multinationals) and the Irish Software Association (ISA) (representing the indigenous software players), make plenty of sense and certainly merit consideration by Cowen. The proposals put across by these bodies smack both of economic good sense and social responsibility.

In its pre-budget statement, ICT Ireland has called on the minister to introduce innovative tax incentives to encourage the uptake of computer and internet usage in the home. The IBEC body that represents the majority of technology multinationals in Ireland also called for the retention of the 12.5pc corporate tax rate to encourage foreign direct investment (FDI) in the sector to continue.

With PC penetration in the home at 42.3pc, Ireland is far behind Sweden (54pc) and the US (82pc) and the chairman of the ICT Ireland Taxation Committee, Peter McManamon, called on the Government to consider a scheme similar to that of Sweden whereby tax incentives were used to boost PC penetration. “This approach has proven to be successful with significant growth. The UK has recently adopted a similar approach under its Home Computing Initiative proposition, by which employees can be offered PC packages with more than 50pc discount compared to the equivalent retail price. A similar type of scheme is encouraged to be adopted in Ireland,” he says.

According to reports on earlier this year, ICT Ireland’s tax incentive dreams may potentially become a reality in the next budget as the Government is indeed considering such a scheme.

According to Section 8 of the Finance Bill 2004, which had its second stage reading by former Finance Minister Charlie McCreevy TD in Dáil Éireann earlier this year, workers using mobile phones, computers and high-speed internet connections provided by an employer to an employee in their home for business use could be exempt from benefit-in-kind within their PAYE tax payments.

The move follows years of lobbying by TDs and civil servants for the Government to come up with the kind of measures that will “aggregate demand” for faster broadband services in urban and rural areas and forms the basis of one of the recommendations of a report due out by the Oireacthas sub-committee on IT on how to drive broadband adoption in Ireland in the months and years ahead.

Its supporters in Government and politics are lauding the move as a “foot in the door” of a broader strategy that may see within the next few years all citizens that use computers and broadband connections at home enjoying tax-free allowances on the equipment they have purchased and the cost of connectivity.

ICT Ireland also called on the Government to remain committed to retaining the existing corporate tax regime. “Any change stated in Government policy to retain a 12.5pc corporate tax rate would be detrimental to our chances to retain and attract FDI to Ireland,” McManamon says.

He says that of the 91,000 jobs in the ICT sector at present, 55,000 are provided by foreign companies. “Low corporate tax rates have been vital in creating employment in Ireland. Over the past few years as the marginal corporate tax rate has been reducing the tax take has increased from €2.16bn in 1997 to €5.16bn in 2003.”

ICT Ireland also stressed that further changes in the PRSI system would impact negatively on
payroll costs for overseas employers in Ireland and called on the Finance Minister to retain the existing PRSI ceiling.

“Overall labour costs in Ireland have been rising faster than in other EU country for a number of years with nominal compensation per employee (before tax) growing on average by 37.1pc over the period 1998-2003. This is compared to average growth in nominal compensation per employee of just 8.7pc in Germany.

“If we continue with this pattern we are at serious risk of driving wage costs so high that we would accelerate the drop in competitiveness being experienced by many Irish businesses. Business costs are continuing to spiral with many organisations having to absorb large increases in insurance, energy and waste disposal costs in addition to rising labour costs,” McManamon says.

Meanwhile ICT Ireland’s sister organisation, the ISA, as well as requesting Cowen on his first official budget to up the limit of the Business Expansion Scheme to €5m, it also called for the individual limit to be raised to €300k per investor. The figure is based on the UK Venture Capital Trust System, which encourages individuals to invest in the UK’s smallest and potentially fastest-growing companies and has been instrumental in encouraging investment.

“At present, there is a structural gap in the market for companies seeking relatively modest sums of risk capital, particularly between the €500k and €3m per round,” says Cathal Friel, chairman of the ISA.

“We need to take our lead from the UK model. This has been shown to be successful in addressing this issue — it is estimated that since 1995, 35,000 people have invested more than £1.5bn sterling in venture capital trusts. If the Irish software sector is to maintain and develop its role as one of the most successful global software players, more needs to be done to encourage individuals to invest directly or indirectly in smaller, higher-risk companies by offering income tax relief to such investors,” Friel adds.

The ISA also pointed out that the research and development tax credit announced in last year’s budget should also be improved upon as small and medium-sized enterprises (SMEs) are not benefiting from it. “Currently the scope of the model has disappointed many SMEs. It has proved quite restrictive and it is for this reason that the ISA would support a formal structure to monitor and access the effectiveness of tax credits,” the organisation states.

The ISA has also called for the amendment of legislation governing the tax treatment of employee stock options under a revenue-approved scheme, with a view to allowing more schemes to qualify for approval and more employees to benefit. At present, only a small number of companies in the software sector qualify to participate, as the current rules governing the tax treatment of employee stock are very restrictive.

Due to changing demographic trends, the ISA warns, the supply of childcare needs to be increased over the next five years. “For this reason, the cost of supplying childcare in the workplace should be tax deductible at the marginal rate,” the organisation states.

Either way, the industry will know later today whether its suggestions will be matched in what Cowen has signalled will be a ‘caring’ Budget aimed at addressing the most vulnerable in Irish society when he pulls out the old battered briefcase, or CD-ROM, that contains the much awaited allocations.

By John Kennedy