Insights

OECD report says economic conditions are good but prospects are clouded with uncertainty

Tom Maguire 

I attended the launch of the OECD’s Economic Survey on Ireland 2018 recently. It’s a 120-ish page document outlining the OECD’s views on our country at the centre of the world. Angel Gurría, OECD Secretary-General, and a former finance minister of Mexico, summed matters up saying: “Ten years ago the crisis and the collapse of the property boom hit Ireland harder than most...But by 2016, the tone had changed completely and we were hearing about how Ireland was growing as fast as China …It’s a remarkable turnaround…”. 

To paraphrase Richard Burton in Jeff Wayne’s “War of the Worlds” (1978): No one would’ve believed over a decade ago that we would later be “scrutinised as someone with a microscope studies creatures that swarm and multiply and a drop of water” with such praise emanating as a result.  It’s not a compliment when it’s a fact!           

Regular readers of this column will know the IMF made similar points last year however (isn’t there always a “however”) they said “the challenge” is to translate this into a “new foundation for sustainable and inclusive growth” because of the external risks of Brexit, US and EU proposals. 

The OECD also made “however” comments saying that some aspects of Ireland’s tax system narrow the base and distort the efficient allocation of resources.  They suggest, among other things, reassessing property values more regularly for local property tax purposes while simultaneously protecting low-income workers who could be adversely affected and that area is being looked at.   

A large section of the report deals with productivity.  It says that Ireland has experienced a decline in productivity growth over the past decade reflecting the “poor performance of local firms with the large productivity gap between foreign owned and local enterprises having widened”.  It argues improving the regulatory environment and notes that access to finance for high performing firms must be broadened as well; that’s where tax comes in. 

The report notes that private equity can boost the creation and development of innovative firms.  Therefore, we should make it easier for such companies to raise such investment.  A couple of years ago the Department of Finance did a public consultation on “Tax and Entrepreneurship” and we made a number of suggestions at the time to amend our tax code e.g.  A standard rate of income tax (i.e. 20%) could apply on dividends from entrepreneurial companies subject to a yearly monetary limit once the business has been in existence for 5 year.  That would (a) encourage entrepreneurs to grow the business for 5 years and (b) retain cash for re-investment in the company during this start-up period.   

We also suggested a loan finance arrangement whereby individuals could lend money to SMEs provided certain safeguards were in place e.g. market interest rates applying etc.  The individual would pay tax on the loan interest at the standard tax rate as opposed to the marginal rate of income tax (i.e. up to 55%).  The OECD’s report notes that business angels e.g. former entrepreneurs etc. operate in a seed/early stage investment and commonly “target firms with high potential to generate substantial revenues over the medium to long term”.  The above suggestions would provide additional incentives for investment in entrepreneurial firms rather than have excess cash invested passively. 

The OECD’s report also argues the government should consider alleviating the debt bias in companies, i.e. interest payments are deductible for corporation tax purposes whereas the return on equity is not.  Therefore, it suggests that companies be allowed deduct a notional return on equity from their corporate tax bill. 

Perhaps the OECD reads the Sunday Independent!  In January in this column, I referred to an EU Commission report, which recommended such a notional deduction although they called it an allowance for corporate equity (ACE) – Tomato…Tomayto!  Even the proposed Common Consolidated Corporate Tax Base (CCCTB) contains an “allowance for growth and investment” which gives a form of equity deduction.  Our views on CCCTB are well known but in January of last year, Minister Noonan said the CCCTB proposal made “an interesting case for giving tax relief for equity investment in a business, which is something which should be examined further”.   Finance Act 2017 didn’t address this and many countries have this ACE up their sleeves.  Are we being left behind? 

The OECD notes that Belgium introduced one in the 2000’s.  The EU says that Portugal had taken measures to address the debt bias granting its ACE to all companies (not only SMEs). Italy and Cyprus continue to apply ACE regimes. The OECD argues that given Ireland’s rate of corporate tax then the reduction in average effective tax levels would be limited.  Should we not implement this because every little helps in financing entrepreneurial and other companies?  We need to eliminate all potential chinks in our tax armoury.        

One last thing on productivity and ok I’m biased here as I’m a big fan of lifelong education and encouraging engagement with the professions, be that accounting, law, tax, HR or whatever beeps your jeep.  The OECD notes that employers need to be encouraged to fund more training for employees and suggests that a greater share of funding under the National Training Fund could be allocated to those in employment.   Fair enough, but on a similar vein, our law previously allowed for a payment by an employer of an employee’s subscriptions to professional bodies to be non-taxable and therefore not PAYE-able on the employee (T’s and C’s applied e.g. relevance to the employer’s business etc.)

That law was repealed meaning that, depending on the employer’s business, it may be more difficult to argue tax-exempt status on such expenditure, which can make engaging with the professions more costly.  Such costs allow employees’ access to the latest thinking in their respective professions to meet their Continuing Professional Development requirements and do their job.  Could this law and its application be revisited given the OECD’s comments and because it’s an issue facing many employers, private and public sector alike. 

Overall, the OECD were suitably impressed with our turnaround in the past decade but nothing’s perfect.  We can do better.  We have the technology.  We got this.

 

Tom Maguire is a tax partner with Deloitte and his fortnightly columns on tax matters appear in the Sunday Independent. The above article was first published on 18th March, 2018.

Did you find this useful?