Industry welcomes ‘strategic approach’ to Budget 2005

2 Dec 2004

In what was a sweeping Budget, Finance Minister Brian Cowen TD abolished stamp duty for first-time buyers of houses worth up to €317k and announced increases in tax relief that effectively removed people in the minimum wage from the tax net. Cowen also reaffirmed the Government’s commitment to the 12.5pc corporate tax regime, a move that was welcomed last night by the multinational technology sector.

Cowen said that the prospects for Ireland’s economy – currently growing more than twice the average growth in the euro area – were positive for the next few years. “If international growth holds up and we if do the right things, we have the potential to grow around 5pc per year in real terms and to keep inflation in the 2pc to 3pc range.” He said the economic situation contained risks such as oil prices, international exchange rates and interest rates. Looking ahead to 2005, Cowen said that the Irish economy will grow by 4.7pc in gross national product (GNP) terms and 5.1pc in GDP terms and that employment will grow by around 35,000. Price inflation, he said will come in at 2.5pc, close to the EU average.

In what is good news for the multinational business community in Ireland, Cowen said that the Government remained committed to a rate of 12.5pc for corporation tax.

Cowen said that in order to provide the nation with more public services gross spending of €45bn has been allocated, an increase of more than €3.7bn over last year.

In terms of infrastructural spending, Cowen said that an additional €334m in additional Exchequer capital was being made available for 2005, bringing total Exchequer cash available for next year to almost €6.3bn. Total investment for the next five years will be €36.3bn. “This means that for 2005-2009 we will maintain our high level of investment in infrastructure at nearly twice the European average,” he said.

Cowen said that he was making infrastructural investment provisions in the Budget for the Government’s decentralisation programme. “This programme is moving forward. Considerable progress has been made and its implementation is well on track,” he said.

One of the biggest infrastructural allocations in Budget 2005 went to transport infrastructure, whereby some €10.2bn will be ploughed into developing the nation’s infrastructure over the next four years to create an infrastructure worthy of a 21st Century economy. “It is my strong view that this is a new initiative which we must put in place if we are to position the economy to continue to grow and compete over the medium term.”

Cowen acknowledged that progress of public private partnerships – seen as a vital tool in leveraging private sector investment and stimulating activity in vital infrastructure such as broadband – have been slower to get off the ground than originally envisaged and that his department is actively examining how to resolve the problem going forward.

Across the board Cowen increased employee tax credits, but the most significant move was the removal of minimum wage earners from the tax net as a result of increasing personal tax credits. As a result some 650,000 income earners on minimum wage will be exempt from paying tax on their earnings.

Cowen also said that various tax reliefs including those on pensions, mortgage interest and medical expenses will be examined in order to be more relevant to today’s modern economy.

In terms of indirect taxation, he said that he was making no changes to existing Vat and excise rates this Budget and that he was going to introduce in the finance bill an excise reduction for the produce of micro-breweries in order to assist development and boost employment in this sector.

Along with the removal of minimum wage workers from the tax net Cowen also drew applause for the abolition of stamp duty on second-hand houses valued at up to €317k for first-time buyers. He also moved to offer reduced rates on purchases up to €635k for first-time buyers.

In what is good news for financial services firms, entrepreneurs and indigenous companies Cowen reduced a duty on the formation of companies and the raising of share capital from 1pc to 0.5pc. He also introduced measures to eliminate a double stamp duty charge on financial cards where a person is merely switching from one provider to another; rectifying a side-effect of recent legislation and removing a barrier to competition between credit-card providers.

ICT Ireland, the representative body for the large number of technology multinationals such as Hewlett-Packard, Intel and Microsoft in the Irish economy, welcomed the Government’s commitment to retaining the 12.5pc corporate tax rate.

Praising Cowen’s “strategic approach” to Budget 2005, Peter Mc Manamon, chairman of ICT Ireland’s taxation group who is also partner at Seer Partners, said: “ICT Ireland strongly supports the Government’s commitment to retaining our existing corporate tax regime and resist any pressure towards EU tax harmonisation. Ireland’s corporate tax regime is cited by many foreign companies as the reason Ireland was chosen for investment. This is a significant issue for the foreign-owned ICT sector based in Ireland as more than 300 overseas companies in the sector have a presence in Ireland directly employing approximately 61,000 people.”

McManamon pointed out that seven of the worlds top 10 leading ICT companies have a substantial base in Ireland. “Many of these companies will actually see their rate of corporation tax increase by 25pc as they move to 12.5pc. Any further increases would have been received extremely negatively.

“In terms of infrastructural development, ICT Ireland welcomes the increase in investment in infrastructure over the next five years of €36.3bn, which is €2.7bn more than last year’s capital budget,” McManamon said.

The American Chamber of Commerce, which represents the hundreds of US firms that have located in Ireland welcomed Cowen’s infrastructural investment allocation but expressed disappointment at the absence of an adjustment to research and development (R&D) credits in the budget. The American Chamber believes that R&D tax credits should be calculated against a fixed base year rather than the moving base year currently in use.

“With a fixed base year, start-up or multinational companies locating new R&D activities here would qualify for the R&D tax credit of a zero base in each future year for the duration of the incentive. This is only as it should be if the incentive is to act as a driver of decisions to locate medium and long term R&D activities in Ireland,” said Ciaran Ennis, president of the American Chamber of Commerce. “The relief is an incentive to create those jobs, rather than being a corporate tax break for business. The Exchequer benefits from the direct and indirect taxes paid by the employees thus reducing any cost of granting the relief”, he said.

By John Kennedy