Ibec budget 2016

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ibec.ie • Budget 2016 - Invest ambitiously

Budget 2016

Invest ambitiously

Budget 2016 - Invest ambitiously • ibec.ie

Table of Contents 1. Our key messages

1

2. The Fiscal Context for Budget 2016

2

2.1 The Spring statement

2.2 The fiscal stance and the economic cycle

3. Personal and consumer taxation

5

3.1 Rates of personal taxation 3.2 Consumer taxation

4. Taxation of entrepreneurship

10

4.1 Taxation of the self-employed and proprietary directors 4.2 Reform capital gains tax entrepreneurs’ relief

4.3 Enterprise Investment Incentive Scheme (EIIS) reform 4.4 Seed Enterprise Investment Scheme (SEIS) 4.5 Stock options

4.6 The R&D tax credit and SMEs

5. International taxation

15

5.1 Introduction

5.2 Knowledge development box 5.3 R&D tax credit scheme

6. Public investment and current expenditure

19

6.1 Capital Expenditure

6.2 Regional Savings and Investment Scheme

6.3 Strategy for Science, Technology and Innovation 6.4 Higher education

6.5 Other education expenditure

7. Structural and competitiveness issues 7.1 Childcare 7.2 Housing

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ibec.ie • Budget 2016 - Invest ambitiously

1. Our key messages Fiscal rules must provide flexibility for investment Budget 2016 will be the first budget subject to the full range of new EU rules introduced by the Fiscal Stability Treaty.

These are broadly sensible and will help avoid repeating mistakes of the past. However, the way in which some

of these complex rules are currently applied is overly-restrictive and has the potential to undermine, rather than

support recovery. They fail to adequately reflect recent positive trends in the economy and, as a result, significantly

underestimate Ireland’s potential growth rate over the coming years. This has resulted in overly conservative expenditure limits, which risk severely restricting much needed long-term investment in capital projects and innovation. We urgently need to look for more flexibility from Europe on how the rules are applied.

Government must invest an additional €1 bn annually Ireland’s investment spend is currently the third lowest in the EU but we have Europe’s fastest growing population.

Unless we change tack now, we are heading for a whole range of bottlenecks as the economy grows. We estimate that the annual investment gap (amount needed over what Government currently plans to spend) out to 2020 is

€2.5 bn annually. The private sector can provide €1.5 bn of this but the Exchequer will need to deliver a

further €1 bn also. There are lots of competing demands for scarce resources but these must be targeted at

the productive investments which will result in more and better jobs, leading to sustained prosperity.

Income tax reform must be targeted Our income tax system is currently not fit for purpose. The marginal rate of tax is far too high and workers are hit with it at exceptionally low earnings. Ireland continues to have the highest marginal tax rate at average earnings

in the world. The recent UK Budget increased the entry point to the higher rate of income tax to the equivalent of

€61,000, while in Ireland it is under €34,000. The relative tax burden on average and above average earners needs to be reduced and no worker, irrespective of income level, should have to pay more than half of marginal income to the State.

Tax system should encourage entrepreneurship There is lots of policy rhetoric advocating the importance of entrepreneurship but the reality of the tax code is very different. Reform is needed to end the discrimination against self-employed workers and proprietary directors; introduce a meaningful capital gains tax (CGT) relief for entrepreneurs; enhance investment schemes; and improve the treatment of share options.

Mobile investment offering must remain competitive Competitor jurisdictions, such as the UK, are continuously improving their offering for mobile investment. In order

for Ireland to remain a leading destination for FDI we must ensure that we have a globally competitive tax

offering and an ambitious investment agenda in skills and infrastructure. In relation to business tax,

Government must continue to work towards a ‘best in class’ knowledge development box and enhance the ‘above the line’ benefit of the R&D tax credit scheme.

Budget 2016 - Invest ambitiously • ibec.ie 2

2. The Fiscal Context for Budget 2016 2.1 The Spring Statement

1.6% in Budget 2016, up from 0.4% under the previous

In its Spring Statement the Government outlined fiscal

two applications are firstly; a more realistic agreed

50:50 split between expenditure and taxation. This

by the Government of ‘tax buoyancy’ as a discretionary

‘expenditure benchmark’ aspect of the Fiscal Compact

criticism by the Fiscal Advisory Council in recent

Commission for. In general terms the ‘expenditure

given that the rules are based on somewhat arbitrary

growth, which is not financed by tax measures, cannot

government’s case here is reasonable for Budget 2016.

Issues surrounding this rule’s application in an Irish

2.2 The fiscal stance and the economic cycle

application of the rule. The differences between the

space of between €1.2 and €1.5 billion based on a

estimate of potential GDP and secondly; the inclusion

fiscal space was based on a revised application of the

tax measure. The latter element was subject of some

which the Government successfully lobbied the EU

times as being against the spirit of the rules. However,

benchmark’ means that any government expenditure

and volatile estimates of potential GDP we think the

outstrip the medium-term growth rate of potential GDP. context have serious implications for budgetary policy.

The medium-term potential GDP estimates used to

The ESRI also raised a second more fundamental

set the benchmark are based on a 10 year average

(backward and forward looking) of potential GDP. Using these periods leads to unrealistically low estimates of

potential GDP on the back of Ireland’s economic crisis.

More worryingly, estimates of population which were

used by the European Commission to calculate potential

GDP under the old application of the rules had absolutely no basis in reality. Principal among the issues with these forecasts were that they assumed net-emigration would continue until at least 2035. In reality Ireland is likely to return to net immigration in the next 18 months.

Figure 1:

Comparison of 2015 EC Population projections for Ireland 2015 - 2045 6.1 5.9

Million of people

5.7 5.5 5.3 5.1 4.9

point on the fiscal stance. Their concern is that given the strong growth in the economy we risk some form of overheating later in the decade if the Government

continues with its plan to run deficits until 2019. If an

economy is growing above potential output levels then running pro-cyclical deficits could add to overheating pressures with consequent rises in inflation and potential losses in competitiveness.

“We believe that economic output is well below its potential level and we need to invest ambitiously to put more people back to work as quickly as possible and support future sustainable prosperity”

2045

2040

2035

2030

2025

2020

2015

4.7 4.5

European comission (2012) CSO (M2F2) European comission (2015)

The eventual agreed application of the expenditure

benchmark rule, which was somewhat adjusted for these issues, means that government expenditure can grow by

It is Ibec’s core view that the production capacity of the Irish economy has not been substantially permanently

damaged by the great recession. IMF estimates suggest that as much as 27% of Ireland’s potential economic output was lost between 2008 and 2013. When we

look at Ireland’s demographics, its openness to the

world, its productivity levels and the competitiveness

of its business model this view does not seem to stack

ibec.ie • Budget 2016 - Invest ambitiously

3

The Fiscal Context for Budget 2016 continued

up. We believe that economic output is well below its

the next five years is about €2.5 bn annually; widening

put more people back to work as quickly as possible

sector and other finance sources can play a role but

potential level and we need to invest ambitiously to

and support future sustainable prosperity. The fiscal

rules are now restricting that investment ambition and we believe that Government must seek additional

flexibilities from the EU Commission. It is clear that the rule methodologies are largely based on a disputable

assessment of the country’s potential economic output.

significantly towards the end of the decade. The private more Exchequer resources will be needed. We therefore

propose that Government seeks a further exemption from the SGP rules for all innovation and capital investment in the economy required to help Ireland reach certain

medium-term targets. These should be 4% of GDP for capital spending and 2.5% for innovation by 2020.

Figure 2 displays the current output gap forecasts

Ireland cannot return to the reckless day-to-day

differences between them but also the fact that they

community urges Government to challenge the EU

for Ireland. What is striking is not only the range of

all point toward a narrowing output gap up in 2016 and onward. Our own judgement, however, is that output

gap estimates for Ireland at the current point in time are very conservative.

spending patterns of the past but equally the business constraints which are restricting much needed and sensible productive investment.

Figure 3:

Budget day measures, % of GDP

Figure 2:

3.0

Output gap forecasts for Ireland

2.0

0.0

Capital investment

2014

2015

2013

2011

2012

2010

2016 (Ibec)

Current measures

European Comission (2012)

2016 (SPU)

IMF

2009

2016

2009 (2)

2015

2007

2014

2008

2005

-4.0

2006

-3.0 -4.0

2004

-2.0 -3.0 2003

-1.0 -2.0

2001

-1.0

2002

1.0 0.0

1.0

2000

% of GDP

% of potential GDP

2.0

Department of Finance OECD

In summary, we think Ireland will remain somewhat

below potential output for some time. Thus the chances of a small expansionary budget fuelling overheating are minimal in the short-term. In addition, debt and

the deficit will remain on a firm downward trend in the absence of a serious shock to the economy.

Ibec believes that in the absence of a more definite

application of the rule methodologies, the existing model should only apply to day-to-day spending constraints.

The Commission has already accepted that investment

in structural reform initiatives and capital spending in the Junker Investment Plan is exempt from the rules. Our estimate of the gap between the levels of investment

outlined in the Government’s stability programme update and the actual amount required by the economy over

In this context, of low borrowing rates and years of fiscal retrenchment, a relatively small expansionary budget

for day-to-day spending and tax reform is justifiable if

it is targeted strategically. Budget 2016 must however prioritise a much more ambitious programme for capacity expanding measures by:

1. Reforming the tax system and public services to encourage labour supply and high skilled immigration

2. Encouraging productive private investment

3. Strengthening productivity, particularly among

domestic industries, and keeping Ireland at the technological frontier

4. Expanding the productive capacity of the economy and providing for future population expansion by removing infrastructure bottlenecks

The country’s hard work should be less taxing

ibec.ie • Budget 2016 - Invest ambitiously

5

3. Personal and consumer taxation Effective tax rates, %

and benefits is highly progressive and redistributive.

45

most progressive in the developed world. There is,

35

40

however, a clear trade-off between this redistribution,

30

Ireland

Ireland is a very low income tax country at lower

than average earnings. For earners above this level,

however, Ireland is a high tax country compared to the

rest of the developed world. At earnings of 135% of the

average wage or just above €44,000, Ireland surpasses

Source: OECD Taxing Wages

OECD

US

UK

France

Sweeden

Australia

Irish debate due to their importance in understanding

the distributional effects of income tax. This aggregate

analysis, however, misses the main economic effect of

income taxation that being its effect on people’s labour market decisions at the margin. There is a clear and

unavoidable trade-off in taxation between redistribution and efficiency recognised as far back as Adam Smith.

It is also well established (Meghir & Phillips, 2009), that

the main avenue through which income taxation affects economic growth is the effect of marginal tax rates on

incentives to take on extra work (the intensive margin), to work at all (extensive margin) and accumulate additional human capital.

Recommendation 1: Reduce the marginal rate of tax

from around €40,000 upwards pay a disproportionate

Reduce the marginal rate of tax by 1% in 2016 and

share of tax and are taxed higher than their OECD

counterparts. By 250% of average wage (€81,500)

Ireland has the sixth highest effective income tax rate in

the OECD at 39.38%, five percentage points higher than the OECD average. At earnings just above €50,000 our

effective tax rates far exceed those in other jurisdictions

with which we regularly compete, causing real problems in terms of competition for skills.

240%

Effective tax rates have received a lot of attention in the

the OECD average effective income tax rate. The

figures show that, in particular, those people earning

250%

230%

210%

220%

190%

200%

170%

180%

160%

140%

150%

% of average earnings

over-time or additional duties.

“At earnings just above €50,000 our effective tax rates far exceed those in other jurisdictions with which we regularly compete, causing real problems in attracting skills”

130%

skilled talent to Ireland, or incentivise staff to take on

0

110%

being able to adequately remunerate skilled staff, attract

5 120%

numbers of Ibec members are reporting difficulties in

10

90%

much higher than in most of our competitors and large

15

100%

tax burden in Ireland for high skilled workers is now

20

70%

attract and retain high skilled staff. The personal income

25

50%

people’s incentive to work and companies’ ability to

% effective tax rate

According to the OECD our income tax system is the

80%

It is well established that the Irish system of taxation

Figure 4:

60%

3.1 Rates of personal taxation

commit to one below 50% by 2017 Cost €158 million

Budget 2016 - Invest ambitiously • ibec.ie 6

Personal and consumer taxation continued

Although average effective tax rates are useful in

In the short-term high marginal tax rates at low income

effects of taxes on individual’s decisions to work are

Estimates of labour supply elasticity to changes in tax

understanding distributions of the tax burden, the

determined by the overall marginal tax rates and the entry point to the marginal tax rate. A high marginal

tax rate or one which cuts in at a low level will reduce the marginal benefit from working additional hours or receiving an increase in pay; additionally it will

reduce the marginal benefit from additional education or training. Prescott (2004), for example, finds that

increases in marginal tax rates in Europe compared to the US explain the majority of the divergence in

labour supply between the United States and European countries over the past thirty years which has had a large effect on economic growth.

Ireland has a marginal tax rate which is amongst the

highest in the OECD but what is more damaging to the economy is the fact that the marginal rate cuts in at

below the average wage; this is the lowest cut in point in the developed world barring Hungary (which operates a 17% flat tax regime) and Belgium. As a result, the incentive to work reduces dramatically at average

wages. This is an issue for business and also for society at large.

Figure 5:

Cut in point for the marginal tax rate as a multiple of the average wage

are fraught with methodological issues particularly for

top earners but the economic literature generally agrees that the work outcomes of women, low earners and

particularly lone parents are affected disproportionately in their labour market decisions (men on the other hand tend to be less affected).

Recommendation 2: Increase the entry point to the marginal rate of income tax Increase the entry point to the marginal rate of

income tax by €1,500 in 2016 for a single person

with a corresponding increase for married couples and other tax cases.

Increase personal credits by €100 for all income earners

Cost €338 million The clear case for reducing marginal tax rates was

recognised by the Government in Budget 2015 with the reduction in the marginal rate of tax from 52% to 51% for those earning under €70,000 and an increase in

the entry point. In this context, it was disappointing that the Government created a third higher rate of tax for

18

workers in the budget by retaining a higher rate of USC

16

for those earning over €70,000. Putatively this caps

14

the ‘gains’ which would go to higher earners, in reality

12

though it is damaging companies’ ability to attract and

10

retain high skilled workers. In a new post BEPS world

8

it is by creating an attractive country for high skilled

6

workers that Ireland will increase its productivity and

4

subsequently grow its economy.

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2 0

will reduce the incentive to work and thus labour supply.

Source: OECD Taxing Wages

Recommendation 3: End the third higher rate of tax End the new third higher rate of tax above €70,000 which is causing problems in attracting high skilled staff.

Cost €70 million

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ibec.ie • Budget 2016 - Invest ambitiously

Personal and consumer taxation continued

Ibec agrees with the intention to broaden the tax base

3.2 Consumer taxation

The intention of broadening the tax base should

Indirect taxes have increased significantly in recent

marginal labour taxation rates but should also mean

These increases are counterproductive for the

away from taxation of labour and on to user charges.

include not only a switch away from damaging higher that Government re-think recent moves to narrow the income tax base further.

“One of the biggest mistakes of the boom years was a narrowing of the income tax base; recent moves seem to run the risk of repeating that”

years with a negative effect on domestic demand.

Exchequer and damage important domestic industries.

As can be seen from the successful reduction in the

rate of VAT for the tourism sector, targeted reductions

in consumer taxes can deliver a benefit to the economy and Exchequer.

Ibec believes that any increase in current VAT or excise rates, which are already exceptionally high, or any

broadening of their base will hurt domestic consumption which is essential to employment and recovery.

3.2.1 Excise duties Excise on alcohol has been increased substantially

in recent budgets including a full-year effect of €180 Although it may appear attractive in year-to-year

comparisons of equity impacts of budgetary policy, the fact remains that low earners in Ireland are already treated very well by the tax system. Some 40% of

income earners do not pay income tax with Ireland

million in 2013 and a further €145 million in 2014.

These excise increases have created a hostile domestic environment for this growing domestic sector putting

pressure in particular on the cash-flow of SMEs and act as a deterrent for investment among larger firms.

having the lowest tax rates on low incomes in the

As a result of these excise increases Irish alcohol

narrowing the base of the USC and income tax further.

in Europe. Eurostat’s latest price indices show Ireland

developed world. This must not be compounded by

One of the biggest mistakes of the boom years was a

narrowing of the income tax base; recent moves seem to run the risk of repeating that mistake.

Recommendation 4: Do not narrow the tax base Ibec is opposed to a narrowing of the tax base. This would be a mistake from the point of view of the

sustainability of fiscal policy and is questionable

economically given the fact that Ireland already has the lowest effective tax rates for low earners in the developed world.

Cost Neutral

prices and excise rates are now amongst the highest

is the second most expensive country in the Eurozone in which to buy alcohol, at almost 62% above the

Eurozone average. The majority of this difference is driven by excise differentials. Recent increases in

excise duties have been a direct tax on Irish households with tax increases passed on to consumers in most cases in the form of higher prices.

Ibec believes that increases in alcohol prices through

excise hikes are quickly becoming counterproductive as the tax will be levied particularly on those households who spend a higher proportion of their income in the

consumer economy. Households in the bottom three

deciles spend on average about 5% of their disposable income on alcohol respectively compared to just 2.7% for those in the top three deciles, increases in excise

will hit these households disproportionately. The path

toward reducing recent excise increases should begin in Budget 2016.

Budget 2016 - Invest ambitiously • ibec.ie

8

Personal and consumer taxation continued

Recommendation 5: Reduce alcohol excise duties Irish excise taxes are amongst the highest in the

Figure 6:

Regional tourism dependency ratio, % of total enterprises < 10%

developed world and are driving inordinately high

10 - 12%

therefore be reversed over the coming years.

16.1 - 18%

price levels. The most recent increases should

12.1 - 14% 14.1 - 16% > 18%

Cost: €50 million

3.2.2 VAT As part of the Jobs Initiative announced in May 2011,

a new 9% rate of VAT on selected categories of largely hospitality goods and services was introduced for a

temporary period running from July 2011 to December 2013. The measure was originally estimated to cost €350 million in a full year.

Various analyses of the employment and Exchequer impact of these measures showed that:

• The measures were very successful and have

delivered strong employment gains and retention

and a substantial direct and indirect buoyancy for the

Source: McFeely & Delaney, 2013, Ibec calculations

Exchequer

The demand for tourism is relatively responsive to

by the measures, over its first 18 months was

is particularly sensitive to changes in its relatively

• The total number of jobs created or retained directly between 15,000 and 25,000

• The tax reduction was passed through to consumers and as a result was a direct annual Exchequer gain from higher Irish consumer and visitor spending in both the sectors directly affected by the VAT reduction and in other retail sectors.

Minister Noonan in his 2014 Budget speech praised the scheme as a “major success” for the reasons outlined.

To re-enforce this success the scheme was continued in Budget 2014. Ibec believes the economic rationale for this scheme has not changed. Tourism in Ireland

continues to be a major and growing economic sector.

The sector has seen a severe adjustment during the

crisis and has regained international competitiveness

and created large numbers of jobs despite suffering real structural issues including very high legacy debts.

price. As a result the competitiveness of Irish tourism high cost base. Removing this support now would

damage employment in the hospitality and broader

tourism sector as increased costs would mean a loss of international competitiveness.

Recommendation 6: Maintain the 9% VAT rate for tourism and hospitality Cost: Cost neutral

ibec.ie • Budget 2016 - Invest ambitiously

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Personal and consumer taxation continued

3.2.3 Discriminatory Food Taxation Fiscal measures specifically aimed at altering behaviour are complex to design and can be highly unpredictable.

Ireland already has a high tax regime on certain foods including beverages and confectionary. While the vast majority of foods in this country are zero rated, the

standard rate of 23% VAT applies to soft drinks, crisps, chocolate, ice-cream and confectionery.

The experience of countries with discriminatory food taxation, such as Denmark, provides real-

world evidence that such taxes are regressive and

ineffective in changing diet and lifestyle-related issues.

Countries that adopt such taxes, unfortunately, are

still experiencing increasing rates of obesity. Denmark

has had discriminatory taxes on certain products since the 1930s and still has seen increasing obesity rates.

In 2011, they introduced a further tax on saturated fat

levels within products. This tax was shown to damage competitiveness, cost jobs and drive cross-border trading leading to its repeal in 2012.

“The experience of countries with discriminatory food taxation, such as Denmark, provides real-world evidence that such taxes are regressive and ineffective in changing diet and lifestyle‑related issues”

The Irish food and drink industry is fully committed to playing its role in helping to tackle obesity and other relevant public health issues. However the obesity

issue will not be resolved by taxation or other forms

of discriminatory legislation aimed at individual food categories.

Discriminatory taxes on food would give a negative

signal internationally, diminishing Ireland’s reputation as the “food island”.

Recommendation 7: Do not introduce discriminatory taxes on food or drink Cost: Cost neutral

Budget 2016 - Invest ambitiously • ibec.ie

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4. Taxation of entrepreneurship 4.1 Taxation of the self-employed and proprietary directors Taxation of the self-employed is an issue which has received much warranted attention in recent times.

Policy makers over the past decade have often lauded

entrepreneurs as being central to developing indigenous firms which can compete globally. The signal we send through our tax system, however, differs greatly from

the rhetoric. The Taoiseach in a speech at Ibec’s CEO

conference, earlier this year, acknowledged as much by referring to the higher rate of tax for the self-employed

Recommendation 8: Remove the USC surcharge for the self-employed over the medium term The USC surcharge is an anachronism given

the direction of enterprise policy elsewhere and

should be removed over time. In Budget 2016 the

Government should reduce the USC surcharge on proprietary directors from 3% to 2%.

Cost: €20 million

as “discriminatory”. With the higher rate of USC for the

The PAYE tax credit in effect allows an individual to

in recent years our tax system has gone in the opposite

tax credit equivalent for self-employed persons or

10 %

the charge is that self-employed persons have available

9 %

claiming for expenses. This reasoning has never made

7 %

back in tax if they are wholly and solely incurred in the

5 %

self-employed (proprietary directors) have no recourse

3 %

workers receive that very same benefit under expense

1 %

to them the means to reduce their tax liability by

8 %

sense given that the expenses can only be claimed

6 %

operation of the business. In addition around half of the

4 %

to these expense claims at all. In either case PAYE

2 %

regimes within firms.

0 %

The surcharge incentivises people to avoid selfemployment or the expansion of relatively small

operations by increasing the marginal rate of tax for

entrepreneurs in direct opposition to stated Government policy elsewhere. With multiple schemes operating to

try to encourage self-employment, this USC surcharge

is likely to have significant deadweight loss and Budget 2016 should see the beginning of its end.

Self employed PAYE Prop director Source: Revenue Commissioners

30,000 to 35,000

elsewhere in the policy system. The notional reason for

incomes

27,000 to 30,000

Government is trying to encourage entrepreneurship

Actual effective tax rates of lower than average

25,000 to 27,000

above €100,000 is an anachronism at a time when

Figure 7:

20,000 to 25,000

The 3% USC surcharge on self-employed incomes

income level.

17,000 to 20,000

thoughts in the upcoming budget.

rates are much higher than PAYE workers at the same

15,000 to 17,000

economy these two issues should be central to our

proprietary directors means their effective income tax

12,000 to 15,000

serious about creating a high skilled entrepreneurial

10,000 to 12,000

direction to much of enterprise policy. If we are truly

earn €8,250 free from income tax. The lack of a PAYE

Under 10,000

self-employed and the higher rates of CGT introduced

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ibec.ie • Budget 2016 - Invest ambitiously

Taxation of entrepreneurship continued

“The 3% USC surcharge on self-employed incomes above €100,000 is an anachronism at a time when Government is trying to encourage entrepreneurship elsewhere in the policy system” Even with tax reliefs available to self-employed persons accounted for, self-employed and proprietary directors at less than average incomes have much higher

effective tax rates than PAYE workers. It is arguable that this is particularly disconcerting for proprietary

directors as they are taxed under the PAYE system

and as a result do not have many of the tax benefits

which other self-employed have access to. Given that

4.2 Reform CGT entrepreneurs’ relief Following increases in capital gains tax (CGT) in

recent years it was necessary that the rate was left unchanged in Budget 2014 and that a new CGT

incentive was introduced for entrepreneurs. However,

the new entrepreneurial relief as currently structured is excessively restrictive.

In particular, the holding period on the new investment is too long and would require in some cases

entrepreneurs to remain in a new business longer than is optimal in order to claim the full benefit of the credit.

Additionally, receiving the CGT relief on disposal of the

second investment means that it is likely to be almost a decade before the entrepreneur could hope to see any return from the tax credit. Even at that it is extremely

rare that an individual who realises a significant capital

gain on disposal of one business realises a second gain and reinvests those proceeds.

it is proprietary directors who are typically those who

These issues have meant that the initiative has no cost

a business in Ireland. Ibec believes the Government

to have minimal cost even then; reflecting its lack of

employ others; this is a particular issue when building should commit to introducing a modest earning income tax credit (EITC) for all self-employed persons. Due to the large cost of this (€450 million in 2015), it would

necessarily be a staged process over multiple years.

Ibec believes that given they are already taxed under the PAYE system this should begin with proprietary

directors expanding to broader self-employed with time.

Recommendation 9: Establish a long-term aim of introducing an Earning Income Tax Credit (EITC) for the self employed The lack of an EITC for the self-employed is not

supported on any reasonable basis. The Government should commit to rectifying this situation over the

medium-term. In Budget 2016 this should begin by

introducing the first phase of an EITC for proprietary directors.

Cost: Proprietary Directors: €45 million in 2016 (€225 million over 5 years)

to the Exchequer until 2017 at the earliest and is likely usability. The current CGT regime means that Ireland

as a base for Irish entrepreneurs continues to be much less attractive than the UK in which to grow or invest in

a business. Feedback from Ibec members suggests that

the relief is likely unusable to all but a very small handful

of entrepreneurs. Members are telling Ibec that the relief does not make Ireland attractive enough as a place

to grow business in comparison to the UK and other

jurisdictions. The relief should be withdrawn and the

UK measures providing targeted CGT relief for trading

enterprises should guide policy to attract and retain high potential business in Ireland.

Budget 2016 - Invest ambitiously • ibec.ie 12

Taxation of entrepreneurship continued

Recommendation 10: Reform the entrepreneurs’ relief to compete with the UK Capital Gains Tax changes (CGT) in recent years have made Ireland relatively unattractive place to

scale a high potential business. This has led to many smaller Irish companies rebasing to the UK. An

entrepreneur’s CGT rate of 10% should be introduced with limits set in order to reduce its Exchequer cost.

Cost: €30 million

In addition to unclear branding the purpose of the

scheme has been confused by the inclusion of the

employment growth/R&D spend restriction. While both aims are laudable, they create unnecessary levels of complexity for both firms and investors.

The requirements are unlikely to have any substantial

marginal benefit for either jobs or R&D as growing firms are likely to grow employment and R&D in any case.

The restriction also adds an extra layer of uncertainty for investors about their potential returns.

Although employment and R&D are positive on a

macro level, restricting small firms in this way may

4.3 Enterprise Investment Incentive Scheme (EIIS) reform

hamper rather than help their growth. For example a

Following its removal from the high earners restriction

and machinery is the largest cost obstacles they have to

in Budget 2014 we saw some turnaround in takeup of the EIIS scheme. Furthermore a number of

recommendations from Ibec’s 2014 submission to the

Department of Finance consultation on the scheme were taken on board. The EIIS scheme was expanded and

the amount of finance that can be raised by a company

increased to €5m annually. The qualifying sectors for the

scheme were expanded to nursing homes, medium-sized enterprises in non-assisted areas, and internationally

traded financial services. In addition, the required holding period for shares was increased from 3 to 4 years.

Ibec welcomed the improvements to the EIIS scheme which have the potential to help SME’s find willing

investors, take on extra employees and expand their operations. The changes are a positive step while

use of the scheme is likely to pick-up as the economy

improves and the high-earners restriction is removed.

Challenges still remain, however, with the scheme’s branding and risk characteristics, with the changes

announced unlikely to make the scheme attractive to non-traditional investors.

It is not clear from its current branding that the scheme is about investment in SMEs or what the benefits of

investing in these companies are for investors or for

society more broadly. It is Ibec’s continuing position that the scheme should be rebranded to make its purpose

clear; namely investing in Irish SMEs. Indeed reverting

to the ‘BES’ branding would be preferable to the current convention of most users referring to it as ‘the old BES’.

large number of firms in receipt of EIIS funding are in manufacturing where raising money to invest in plant

overcome. These firms are labour and capital intensive

but severely disadvantaged by the terms of the scheme.

Additional employment will not come in the absence of the basic capital goods needed for production

regardless of the scheme design. The restriction, as

structured, creates incentives for investors to second guess the entrepreneur’s knowledge of what capital

allocation will best benefit the firm’s growth. In these

cases the overall result for employment and R&D will

be negative in the medium-term as businesses invest available funds sub-optimally.

Ibec recommends that the restriction be lifted with a

30% up-front payment and 11% over a three year period regardless of how the funding is allocated.

Recommendation 11: Reform the EIIS scheme Following Ibec’s submission on the consultation on

the EIIS in 2014 there was significant changes to the EIIS in Budget 2015. There are a number of further reforms of the scheme which we believe remain outstanding:

Re-brand the EIIS scheme Drop the employment or R&D restriction Cost: Cost Neutral

ibec.ie • Budget 2016 - Invest ambitiously

13

Taxation of entrepreneurship continued

4.4 Seed Enterprise Investment Scheme (SEIS) scheme

Recommendation 12: Introduce an equivalent to the SEIS scheme

The UK has recognised the differential risk profiles between micro and medium sized enterprises by

introducing the SEIS which provides more generous

incentives for individuals investing in start-up firms less than two years old with less than 25 employees and gross assets of less than €200,000. Costing £58.5

million (€81 million) this scheme is targeted at a totally different category of firms than the EIS namely those

very small and micro-firms which are newly formed. In this sense it complements rather than competes with

An introductory version of the SEIS scheme similar to its UK equivalent would remove a barrier to

small start-up business whilst also getting first time

investors into the market. For example a 50% income tax credit on investments in new or micro-firms on similar terms to the UK scheme.

Cost: €8 million

the EIS scheme where most if not all of the funding tends to go to mid-cap companies.

4.5 Stock options

Figure 8:

Share-option and profit sharing schemes can be a very

SEIS (UK) investor profile

important way for start-up companies to reward and

retain key employees. They also have proven benefits

1000

for established companies in rewarding key staff and

900

generating higher productivity through employee buy-

Numer of investors

800

in. The current system of taxation for these schemes

700

worked well in the past but changes in recent years

600

have reduced the attractiveness of such schemes to

500

firms.

400 300

Firstly, the operation of the revenue approved APSS

200

and SAYE schemes could be reformed to be more

100 100,000

75,000

50,000

25,000

20,000

15,000

10,000

5,000

2,500

1,000

flexible to companies’ reward structures. Currently 500

0

Investment amount upper band limit (£) Source: HM Treasury

The SEIS scheme also has the added advantage of

being more attractive to small time investors who can

invest up to €100,000 in a single tax year over a number of companies. They receive a 50% tax credit on their

investment which is sufficiently attractive to bring new investors to small firms with limited other avenues of

funding. Additionally almost half of the investments were of less than £10,000 showing the scheme’s ability to

attract non-traditional investors into the market in small

sums. This is partly due to the fantastic branding of the scheme and ease of use. Ibec believes a similar angel

investment tax incentive should be introduced here for

start-up firms and micro-enterprises in approved sectors.

these schemes must be operated by rigidly applying the same terms to all employees. This is growing ever more difficult for companies to implement given the work

undergone in recent years to link reward to individual and team productivity and performance.

Secondly, the tax treatment of stock-options in start-

ups is a particularly pressing issue for new firms which should be addressed in Budget 2016. Typically staff in start-up companies will have low incomes, relative to the market, as the business builds. As a result share

options may well be a central if not the majority part of

the remuneration package for many employees in start-

ups. In this sense the onerous taxation on stock options in these firms is a particular disincentive to leave more

stable employment in larger companies to start or join a start-up firm.

Budget 2016 - Invest ambitiously • ibec.ie 14

Taxation of entrepreneurship continued

R&D tax credit take-up by firm size 25.0

fairly small gains attract an effective tax rate of 52%

the granting and exercising of the option for employees

over €10,000,000

€900,001 - €1,00,000

€1,000,001 - €5,000,000

€700,001 - €800,000

€800,001 - €900,000

€5,000,001 - €10,000,000

effect waives the income tax due on the gain between

€600,001 - €700,000

EMI (Enterprise Management Incentive) credit which in

€500,001 - €600,000

The UK has recognised this with the introduction of the

€400,001 - €500,000

gain which few of them will ever make again.

€300,001 - €400,000

time paying 52% of what they receive. This is a once-off

0

€100,001 - €200,000

options only when the company is being sold, at that

5.0 €200,001 - €300,000

to raise cash to meet that liability and exercise their

10.0

€50,001 - €75,000

disposal). As a result in many cases employees struggle

15.0

€75,001 - €100,000

of these employees (as no cash gain arises until

20.0 % of firms

which would necessarily be paid out of the low salaries

€1 - €25,000

gains when they are sold. Typical examples could see

Figure 9:

€25,001 - €50,000

when they are exercised and additionally as capital

Negative or nil

Currently gains on stock options are taxed as income

Size of net income

within certain firms; instead taxing them only on the

We recommend that a streamlined or ‘credit lite’

needed in Ireland and would make working in a start-

include the use of pro-forma templates for R&D project

capital gain from the sale of stock. A similar scheme is up company much more attractive to many. At the very least the income tax owed on the exercise of an option

by all employees should be taxed as a capital gain and

averaged over a number (up to 5) years rather than paid in the lump sum which is now the case.

model should be developed for SMEs which would

management, recording R&D activity and calculation of eligible costs and revenue benefit associated with the credit. Simple on-line calculators demonstrating

the benefit and eligibility rules of the credit would be a useful resource for SMEs and would also greatly improve awareness and promotion of the scheme.

Recommendation 13: Reform employee share options schemes

Recommendation 14: Introduce a R&D tax credit for small firms

Budget 2016 should encourage more people to join

The administrative costs associated with the R&D

to the EMI scheme in the UK where share options are

participate with the credit. A pro-forma R&D tax credit

or work in start-ups by introducing a scheme similar given relief from income tax and USC.

Cost: No cost in 2016. €1 million per annum thereafter

4.6 The R&D tax credit and SMEs Ibec believes the Government should consider launching

a ‘credit lite’ R&D tax credit model for SMEs. Many SMEs, despite undertaking research and development activities, are not engaging with the credit due to its complexity and administrative requirements. Ireland is also out of line

with many of its competitors by not having a significantly more attractive R&D tax credit regime for SMEs.

tax credit are too burdensome for smaller firms to

should be introduced to help smaller firms overcome these costs and engage with the credit.

Cost: €5 million

“Ireland is also out of line with many of its competitors by not having a significantly more attractive R&D tax credit regime for SMEs”

15

ibec.ie • Budget 2016 - Invest ambitiously

5. International taxation 5.1 Introduction

economic reason for the excessive focus on patents

Ireland needs to continuously review its business tax

interpreted too strictly many sectors of the economy

offering in order to ensure that it remains competitive

within the current modified nexus approach and if will be systematically disadvantaged.

with other jurisdictions seeking to attract a similar profile of FDI companies. Ibec believes that the competiveness of the business tax regime must be underpinned by: • the 12.5% corporate tax rate

• a world-class R&D tax credit scheme

• a competitive personal tax regime for high skilled and mobile workers

• a best in class knowledge development box (KDB) In Budget 2016 Government must clearly set out its commitment to continue work on a KDB which will

drive innovation in Irish business and help attract and

retain IP and related activity. It should also make further enhancements to the R&D tax credit scheme in order to

“In Budget 2016 Government must clearly set out its commitment to continue work on a KDB which will drive innovation in Irish business and help attract and retain IP and related activity”

ensure that it delivers maximum impact.

5.2 Knowledge development box In April, Ibec made a detailed submission to the

Department of Finance on the Knowledge development box (KDB). In that submission, we outlined the

major work that needed to be undertaken before a

‘best in class’ or even usable KDB scheme could be

implemented. Government should re-commit in Budget

2016 to introducing an ambitious scheme which is ‘best in class’.

1. The Knowledge development box must be ambitious and focus on innovation

The proposed modified nexus approach in its

current form has the potential to militate against how innovation is performed in many Irish companies.

In many smaller countries with a focus on high

value added services, software and manufacturing

excellence, much of the focus of innovation is on the process rather than on traditional ‘white coat’ R&D.

Ireland needs a KDB which is focused on innovative ways of commercialising and developing knowledge

into a final product. As currently proposed, however, business believes that excessive focus on product

innovation and certain types of R&D will favour larger countries at Ireland’s expense. There is no good

2. Marketing intangibles are a crucial element of innovation for many industries

The potential exclusion of marketing related IP assets under the modified nexus approach is unfortunate.

Marketing intangibles such as trademarks, trade secrets, copyright and consumer research are

crucial to the R&D process in many industries where

patenting is not a viable option. Marketing intangibles

often include post development research and analysis which is key to future product enhancements. In a

number of sectors the majority of R&D expenditure

involved in incremental innovation of existing products would be excluded under this definition.

3. Qualifying expenditures should be based on a template of existing schemes

The best way to ensure that there is equal treatment across all sectors and businesses of different sizes is to use an established approach already familiar to firms and tax authorities alike. We suggest that by using standards that are already in use and

understood by taxpayers and taxing authorities

through their interaction with R&D tax credit regimes the issues raised by BEPS could be overcome. This

could be done whilst also achieving the aim of being

Budget 2016 - Invest ambitiously • ibec.ie 16

International taxation continued

easy for business (of varying sizes) and authorities to

jurisdiction where these skills are necessary to a

national innovation policy base. There is no reason

providers which is central to the performance of R&D

engage with and understand and having a coherent within the modified nexus approach, however, to tie

the KDB to the Frascati definition used under the R&D tax credit. This is a limiting factor on use of the R&D

tax credit for many companies. Where there is scope to push the boundaries of qualifying expenditure or

innovation definitions in order to make the KDB best in class this opportunity should be taken.

4. Encouraging SME participation It is vitally important that the KDB is usable from

an administrative point of view for SMEs. Tracking by asset would be extremely expensive and

burdensome for a MNE to administer; it would be

prohibitively expensive for any SME. Certainty is also an important point to consider when encouraging SME participation in the KDB. Where a patent is

subsequently declared invalid there should be no

project. Collaboration with specialist R&D service

in many industries and to Irish innovation policy will be affected by this approach. The final design of

the KDB must give serious thought to companies’

interactions with each other as well as with Higher

Education Institutions and research institutes. The

current proposals may have a serious effect on how

these structures operate for companies and Ireland’s innovation eco-system.

“It is vitally important that the Knowledge Development Box is usable from an administrative point of view for SMEs”

revenue claw-back or limited claw back for SMEs. From the supply side in these relationships it is

important that SMEs are not disadvantaged in terms

of their interaction with larger companies. In order to encourage collaboration between SMEs and larger

firms’ limits on qualifying outsourcing should exclude work outsourced by MNC to SMEs.

5. The administrative burden must be reasonable It is important that the methodologies to be agreed

for identifying qualifying expenditure are simple and practical, not only for years prior to the rules being

defined but also for ongoing expenditure. Taxpayers will face considerable challenges in tracking and

tracing income from IP. Ibec believes that the prime

tenet of this element of the IP regime should be that the costs of compliance do not outweigh potential benefits.

6. Outsourcing requirements must take into account existing innovation structures

Ibec is concerned that the modified nexus approach

penalises companies for outsourcing R&D activities,

particularly in small open economies such as Ireland, where the pool of available labour is too small to

contain all relevant specialisms. In a globalised world it is common to work with talent located outside the

7. The Knowledge development box must form

only one part of improving Ireland’s innovation supports system

Ibec has outlined in previous submissions that

although a successful KDB is central to Ireland’s

international tax offering, it is only one part of the

necessary reform needed in order to ensure Ireland is able to continue to compete internationally.

Improving the domestic skills base, investing in

infrastructure and education, continuing reform of the

R&D tax credit, creating an attractive intangible asset regime and lowering Ireland’s income tax burden

on high skilled employees must all form part of the policy mix.

Recommendation 15: Work toward introducing a ‘best in class’ Knowledge development box A successful KDB is central to Ireland’s international tax offering, Government should continue the work toward introducing a ‘best in class’ scheme and should re-commit to this in Budget 2016.

Cost Neutral

ibec.ie • Budget 2016 - Invest ambitiously

17

International taxation continued

5.3 R&D tax credit scheme The recent Government review of the R&D tax credit

scheme has shown that it is very effective in supporting R&D activity and provides a good return on investment

for the Irish economy. In order to maximise the impact of the scheme we recommend that two further cost neutral changes are made.

1. Improve the certainty for business Lack of certainty in relation to the scheme remains the single biggest weakness from a business

perspective. This lack of certainty has damaged the reputation of the scheme internationally and

undermined its overall effectiveness. Measures to

improve certainty for businesses using the scheme should include a streamlined technical appeals process and the establishment of a centralised

specialist unit in the Revenue Commissioners for all

businesses using the scheme. The current model of

non-specialist advice at a district level results in a lack of consistency in rulings and guidance to industry.

In addition the R&D Tax Credit rules on outsourcing

currently discriminate against HEIs in the percentage of expenditure against which outsourced work may

be claimed. The situation should be equalised, with the higher percentage amount of 15% applying to

HEIs as well as other entities. In addition the current

requirement for 100% matched funding on the part of the small firm should be relaxed to 50%.

Lack of certainty in relation to the scheme remains the single biggest weakness from a business perspective.

2. Amend the scheme legislation to enable

expenditure relief at 12.5% corporate tax rate to be taken above the line

The recent change to the legislation which allowed

companies to show the credit ‘above the line’ greatly improved the attractiveness of the scheme to many businesses at no extra cost to the Exchequer.

The change in accounting treatment meant that

businesses could use the credit more effectively

when competing for mobile R&D projects on a pretax assessment basis with other jurisdictions.

Government should now build further on this change and introduce an election in to the R&D legislation which would provide companies with an option

to claim the R&D tax credit at 37.5% ‘above the

line’ while foregoing the associated corporate tax

deduction at 12.5%. Such an election would lead to a 50% increase in the potential ‘above the line’ credit.

The denial of a corporate tax deduction at 12.5%

on the qualifying R&D expenditure means that the

proposal is a cost neutral one from the Exchequer perspective, and will result in the same level of

overall tax payable as is presently the case under current legislation.

Recommendation 16: Administrative changes to the R&D tax credit Lack of certainty in relation to the scheme remains the single biggest weakness from a business

perspective this can be easily rectified in Budget 2016

The legislation should be changed to allow

companies to claim the R&D tax credit at 37.5% ‘above the line’ while forgoing the associated corporate tax deduction at 12.5% Cost Neutral

Growing your infrastructure shouldnâ&#x20AC;&#x2122;t be a pipe dream

ibec.ie • Budget 2016 - Invest ambitiously

19

6. Public investment and current expenditure 6.1 Capital Expenditure

Capital expenditure is essential for enhancing the

Between 2008 and 2013 voted government expenditure

economic growth. Capital expenditure fell significantly

fell by 12.5% as the State addressed the continued need to reduce government expenditure. Despite

productive capacity of the economy and thus generating during the crisis and this needs to be reversed in the

2016 Budget to avoid the countries infrastructural deficit

the continued need to tightly control government

expenditure, in the post-bailout period Government will have greater flexibility in its fiscal decision making. In this context there are some very good reasons why

growing. Given demographic trends, there is even more pressure on Government to address this issue before economic growth is constrained.

Figure 11:

investment in infrastructure should return to the fore in

Government capital expenditure 1995 - 2020

Government thinking.

(% of GDP)

Figure 10:

6

Actual & planned Government capital expenditure

5

4 3 2

0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (f) 2017 (f) 2018 (f) 2019 (f) 2020 (f)

1

Source: DPER. Forecasts based on stability programme update (2015)

In the 1990s lack of investment in infrastructure left a rapidly expanding economy with severe bottlenecks in some areas. This was overcome in the middle

part of the last decade through a process of rapid and expensive infrastructure growth. However,

since 2008, infrastructure expenditure has fallen

significantly. Capital expenditure has made up over 70% of total expenditure cuts since 2008. This has led to a situation where by 2016 between 90% and

95% of capital expenditure will be on maintenance.

Indeed due to depreciation of existing capital assets the coming years may for the first time see net dis-

investment by Government in capital infrastructure.

Cuts in recent years may have been necessary given fiscal circumstances, however, demographic and

competitiveness pressures mean that a new approach is needed in the period between 2016 and 2020.

4 3 2 1 0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

% of GDP

5

10 9 8 7 6 5 4 3 2 1 0

% of GDP

6

Capital expenditure (€ bn)

1995 – 2020

SPU (% of GDP)

Ibec (% of GDP)

Although Government must remain the main funder of national infrastructure projects there is a need to

embrace a greater diversity of funding and co-funding options particularly those with off balance sheet

potential. Commitment to this type of funding model has been uneven in the past and greater buy-in is needed

from all stakeholders in order to substantially increase the level of private sector funding in infrastructure

provision. Ireland needs greater diversification in its nonExchequer funding sources and these need to be fully

integrated into long-term national infrastructure planning.

“Indeed due to depreciation of existing capital assets the coming years may for the first time see net disinvestment by Government in capital infrastructure”

Budget 2016 - Invest ambitiously • ibec.ie

20

Public investment and current expenditure continued

The Irish state should look to confront serious long

term competitiveness and demographic challenges by spending 4% of GDP on infrastructure by 2020.

This will ensure that we do not repeat the mistakes of

previous economic downturns when cutbacks in capital expenditure led to bottlenecks which proved costly to overcome in subsequent years. The first attempts to

reach this should involve increasing capital expenditure by €800 million in the 2016 budget bringing total expenditure up to €4.5 billion.

Recommendation 17: Increase capital investment and renegotiate Stability and Growth Pact rules Government should seek a further exemption from

the Stability and Growth Pact rules for all innovation and capital investment in the economy required to help Ireland reach certain medium-term targets.

These should be 4% of GDP for capital spending and 2.5% for innovation by 2020.

In Budget 2016 the Government should expand the capital budget by €800 million to reach 2.15% of GDP.

Cost: €800 million

Proposal details: • Government to establish through the NTMA/ISIF a savings and investment scheme to be open to investors for a three year period

• Scheme to be targeted at lump sum household investors and regular savers

• Government to provide matching funding of €1 for each €5 invested (for 5 year investments and pro rata for longer durations)

• Funds committed by investors for a period of at least 5 years but ranging up to 7 years

• In order to ensure that fund disbursement is spread over a number of years, investment limits could be placed on bonds of varying maturity

• Annual investment amounts to be capped at €10,000 • Annual return on investment to be at rates

competitive to other NTMA savings products

• Government to guarantee capital sum of all amounts invested

Increasing investment through off-balance sheet vehicle

• Stability and growth pact restrictions limit

Government ability to commit Exchequer funds to much needed infrastructure investment –

conventional borrowing model is therefore limited despite record low interest rates

• The bulk of deficit and debt implications would not

6.2 Regional Savings and Investment Scheme Objectives: • To provide an off-balance sheet fund for investment projects in infrastructure and for business financing

• To support balanced regional development by

addressing infrastructure and investment gaps in the regions

• To provide Government with a fiscal tool to address any overheating concerns in the economy by

supporting supply side measures to underpin potential growth

arise until funds are repaid to investors over a t+5 to t+7 timeframe

Balanced regional development • Target could be set for percentage of fund to be invested outside of Dublin

• Focus on infrastructure projects in areas such as social housing, roads, environment, broadband,

research infrastructure and education etc which by

definition will be well dispersed throughout the regions

ibec.ie • Budget 2016 - Invest ambitiously

21

Public investment and current expenditure continued

• Additional investment available for firms

• Jobs created in construction phase, with a particular focus on employment in the regions

• Long-term potential growth rates of regions

Recommendation 18: Introduce a regional savings and investment scheme To redirect savings into productive uses Government should introduce a regional savings and investment scheme

need to increase throughout the whole economy. The

2.5% target should be reached using a combination of public and private industry funding. The Government should be prepared to spend approximately 0.8% of GDP on R&D while private industry should finance

the remainder. By 2020 total spending on R&D should therefore be €6.2 billion and government expenditure should account for €1.9 billion of this. In 2013, public

expenditure on R&D was €732 million which accounted for 0.4% of GDP. Assuming that this share has not

changed, in 2016 the Government should aim to spend

0.45% of GDP on R&D, which equates to approximately €940 million, an increase of just over €200 million.

Figure 12:

R&D spending by government

Cost: €200 million

In 2006 Ireland agreed to make attempts to meet the European target for total R&D expenditure by 2020.

% of GDP

6.3 Strategy for Science, Technology and Innovation

0.9

2,500

0.7

2,000

0.8 0.6

1,500

0.5 0.4

1,000

0.3

0.2

500

0.1 0

0

This was agreed to be 3% of GDP by 2020 but during

the crisis this target was reversed to 2% of GDP. Given that the economy is seeing strong signs of recovery,

Government should be more ambitious and increase this target to 2.5% of GDP by 2020.

The Government should be prepared to spend approximately 0.8% of GDP on R&D while private industry should finance the remainder.

Recommendation 19: Increase spending on Science Technology and Innovation Introduce a target of 2.5 % of GDP for spending on

Science Technology and Innovation in order to boost productivity.

Cost: €200 million

R&D Expenditure € m

Economic impact

In order to reach this ambitious target, R&D activity will

2020

affected by crisis legacy issues

2019

and to support spending power in households

encouraging innovative activities in less intensive sectors.

2018

reductions needed for international competitiveness

well as facilitating the emergence of indigenous firms and

2017

• Provides an additional policy lever at time when tax

we remain to be an attractive place to conduct R&D as

2016

economy diverges from eurozone

Ireland is a small and open economy, it is imperative that

2015

inappropriately low interest rates as Ireland’s

Government must continue to invest in R&D. Given that

2014

• Stabilisation fund needed to counterbalance

In order to boost productivity and competitiveness, the

2013

Stabilisation fund to address overheating

Budget 2016 - Invest ambitiously • ibec.ie 22

Public investment and current expenditure continued

6.4 Higher education

The overall level of funding of the Higher Education

Given Ireland’s high participation rates in higher

been declining since 2007/08. Between 2008 and 2014

two countries where expenditure per student also fell. A commitment needs to be made to no further reductions

Education was established in 2014 to identify and

10,000

1,750

9,500

8,500

consider issues related to the long term sustainable

funding of higher education in Ireland and to identify

funding options for the future. While the Group has been

1,700

9,000 2015/16

The Expert Group on Future Funding for Higher

1,800

2014/15

will still require increased private investment.

10,500

2013/14

Even if this is done, demographics and quality concerns

1,850

11,000

2012/13

in the upcoming strategy on higher education funding.

11,500 € per student (FTE)

in state expenditure and to increasing public investment

1,900

12,000

1,650

source: HEA

involved in a thorough consultative process, in which

These changes have meant major changes in the

the main policy options were set out six years ago by

Direct funding from the Exchequer has dropped from

Ibec has been pleased to participate, we believe that the Department of Education.

“Government should reverse damaging cuts and put in place an effective student fees and loan system to underpin the sustainability of a high-quality higher education system”

structure of how higher education in Ireland is funded.

75.5% of higher education funding to almost 51%. This

is due to increases in the student charge and reductions in overall funding including income from the charge.

Including indirect Exchequer funding through the student charge (around half of all student charge income comes from higher education grants) Exchequer funding has fallen from 78% to 65% of the total with a movement

toward indirect funding. This compares with the OECD

average of 68% and the EU average of 76.4% for 2010, the latest year for which figures are available.

Figure 14:

Expenditure in Irish higher education by source 1 100%

should reverse damaging cuts and put in place an

effective student fees and loan system to underpin the

sustainability of a high-quality higher education system.

1

Direct exchequer funding Indirect exchequer funding Non-exchequer

Note: Does not include research funded indirectly by the Exchequer or other spending on institutions directly from the Department of Education and Skills

2015/16

2014/15

2013/14

2012/13

amount to 19% of total institutional income. Government

0%

2011/12

from the total of income from non-State sources), will

20% 2010/11

is, excluding higher education grants and as distinct

40%

2009/10

By 2016, privately paid student contributions (that

60%

2008/09

education is a threat to Ireland’s future prosperity.

80%

2007/08

The absence of a robust financing model for third level

Recurent income/expenditure € m

Expenditure in Irish higher education

2011/12

tertiary education decreased since 2008 and one of only

Figure 13:

2010/11

one of only four OECD countries in which expenditure on

further fall expected out to 2016.

2009/10

respect of both public and private investment. Ireland is

2008/09

from completing tertiary education, action is needed in

total funding per student decreased by 22% with a

2007/08

education (HE) and the high public and private returns

Authority (HEA) for higher education institutions has

ibec.ie • Budget 2016 - Invest ambitiously

23

Public investment and current expenditure continued

The current position is unsustainable. The combination

Investing in the skills supply can help to transform the

carries risks which are further exacerbated by forecasts

easily recruit skilled workers who, in turn, improve the

of growth in numbers and the reduction in resources

for continued growth in student numbers. The European Commission, for example, forecasts numbers in Irish higher education to increase by almost 40,000 over

the next ten years. Increases in student numbers of this magnitude cannot be facilitated under current

funding arrangements without jeopardising the quality of education.

Recommendation 20: Introduce a student fees scheme in the medium term and reverse damaging cuts to the exchequer contribution to higher education The current position in higher education funding is

unsustainable and is close to breaking point. A new

approach is needed in the upcoming report by Expert Group on Future Funding for Higher Education.

kinds of employment on offer, as employers can more quality of the work. In order to support longer-term

economic development, policy makers therefore have

an interest in helping to increase the demand for skills.

There is a need to “shape” demand, as opposed to merely respond to it.

“a rebalancing of the National Training Fund allocation to in-employment training is urgently required.”

Ireland performs poorly in terms of participation in lifelong learning and upskilling. At 7.3%, Ireland is below the EU average of 10.5%; the gap is widest

for employed persons, with Ireland’s rate being 5.2

percentage points lower than the EU average (6.2%

6.5 Other education expenditure The economic returns from investment in education

tend to accrue mainly in the medium to long-term but it

is vital that we treat it as a priority area for investment. A sustainable economic recovery will depend on a world class education and training system.

6.5.1 In-employment training National Training Fund (NTF) allocations to programmes for those in employment amount to just one fifth of the

level of training for-employment programmes. Given the scale of the unemployment challenge, the diversion of

NTF fund allocations to labour market activation during the economic crisis was understandable. However, we have reached a stage where a rebalancing of the NTF

allocation to in-employment training is urgently required.

The unemployment rate remains unacceptably high but the recovery momentum is having a significant impact on employment creation. We now need to focus on

the sustainability of existing employment by improving competitiveness through upskilling and reskilling.

compared to 11.4%). Ireland also lags significantly

behind the top performing countries such as Denmark (31.4%), Sweden (28.1%) and Finland (24.9%). In

addition, the gap between Ireland and the EU average has widened in recent years.

The Skillnets programme, based on a business-

government co-financing model, has been one of the

most cost effective examples of stimulating enterprise-

led training. Current funding stands for the programme’s in-employment training activity stands at just 45% of its 2008 level. Cuts in its allocation should be reversed.

Recommendation 21: Fund upskilling • Lifelong learning programmes with defined

learning outcomes should be reprioritised and

adequately resourced in the forthcoming National Skills Strategy

• Cuts to the Skillnets budget should be reversed Cost: €15 million

Budget 2016 - Invest ambitiously • ibec.ie 24

Public investment and current expenditure continued

6.5.2 Apprenticeships

6.5.3 Secondary education

The establishment by Government of an Apprenticeship

Our economy and our prosperity are intrinsically linked

new apprenticeships received by the Council from

In radically reforming the junior years of second-level

Council, and the number and quality of proposals for

consortia of business and education/training providers, has been an encouraging development. This offers

a unique opportunity to broaden apprenticeships in Ireland, meet the skill needs of industry and deliver real choice for young people and other learners as

they move into and within the world of work. However, significant work remains to be done to develop

proposals into sustainable apprenticeships and this will require funding and support.

Recommendation 22: Establish a ring-fenced fund to support the development of new apprenticeships Cost: €5 million

to the strength of our secondary education system. education, we will deliver better outcomes for our

students and help to underpin our long-term prosperity.

The recent agreement between the Minister for

Education and Skills and the teachers’ unions should bring certainty about the nature of the reform being

introduced. Its successful implementation will require significant investment in continuing professional development for teachers in new assessment

techniques and supporting ICT infrastructure. A dedicated funding stream to develop teaching

excellence in Science, Technology, Engineering and Mathematics is also required.

Recommendation 23: Funding teacher training The recent agreement on junior cycle curriculum reform should be supported through a

comprehensive continuing professional development programme for teachers.

Cost: €6 million

ibec.ie • Budget 2016 - Invest ambitiously

25

7. Structural and competitiveness issues

90%

respect of childcare costs versus potential state social

80%

OECD report, the net cost of childcare in Ireland was

60%

share in the EU. The OECD average was only 18.4% of

40%

the average wage.

Various reports have put the average cost of full time childcare at €1,000 per month per child. This means that a parent of one child earning a gross salary of

€37,500 and paying childcare costs, would only take home the same in net terms as if they were earning

the minimum wage. If this parent were paying for two

50%

30% 20% 10% 0%

2020

45.2% of the average wage, which was the highest

70%

2019

benefits and no childcare costs. According to a 2012

2018

potential wages subject to a significant reduction in

100%

2017

to the labour force, parents face a trade-off between

State childcare expenditure (% share)

2016

When it comes to deciding whether or not to return

Figure 15:

2015

7.1 Childcare

% Cash Benefits % Childcare Services

children in childcare that person would need to earn

In order to begin this rebalancing, the Government

a huge disincentive to work for parents despite the fact

outlined in the Mangan report. While the Mangan report

€63,500 to take home the minimum wage. This poses that staying in work has a positive impact on future

earnings which may eventually outweigh these initial

costs. As a result, the Government should intervene in order to improve participation rates and enhance the productive capacity of the country.

A medium- term strategy is needed to ensure affordable childcare in the country. While government expenditure

on childcare is relatively low by international standards, we make up for this by giving cash transfers to parents in the form of Child Benefit. Currently the state spends

€1.9 billion on Child Benefit payments and €260 million on childcare services giving a total budget of €2.16

billion. The Government should aim to rebalance this

budget away from direct payments in favour of childcare provision so that there is a 50:50 split between the two by 2020.

should firstly adopt a two tier child income support as envisaged that the total amount distributed under a

revised Child Benefit scheme would remain the same by increasing payments to low income families and

paying less to high earners, we propose that the total

budget should fall, and this burden should fall on high

income families. A universal payment would still remain, which would be lower than the existing payments.

A second payment would then be made to families

whose incomes fall below a certain threshold. Under

this scheme low income families would still receive the same amount as their existing payments, but those on higher incomes would receive less and the funds thus released would be assigned to subsidise childcare

including after and before-school programmes. The overall sum released from the current Child Benefit

Scheme would be put towards providing assistance for

childcare and the overall package would be cost neutral.

Budget 2016 - Invest ambitiously • ibec.ie 26

Structural and competitiveness issues continued

The Early Childhood Care and Education (ECCE) scheme grants a free year of pre-school care

for children of a certain age and costs the state

approximately €171 million. The Government should aim to redistribute €200 million of child benefit

expenditure in the 2016 budget using the two tier

system suggested above. Part of this released funding should then be used to extend the ECCE scheme

so that it covers two years of childcare costs. The remainder should be used to subsidise after and

before school childcare costs for children who do not fall into this age group. The State should continue to

economy recovers and consumer sentiment improves.

In 2014, the Economic and Social Research Institute

suggested that 25,000 new houses are needed each

year to meet increased accommodation demands driven by population growth in urban areas and increased household formation. In 2014 and 2015 (forecast), around 10,000 new units were delivered, further

widening the gap between demand and supply. The

inevitable consequences of this have been increased

rents and house prices and a lack of affordable housing in urban areas where need is greatest.

redirect 10% of the child benefit budget to the funding

Delay in the supply of new housing is a consequence

funds should be split evenly between child benefit and

sector, high regulatory costs and delays in the planning

of childcare provision on an annual basis. By 2020 childcare services.

of a lack of financing into the property development

process. Ibec welcomes the provisions of the Urban

Regeneration and Housing Bill (2015) and the Planning

Recommendation 24: Adopt a medium-term strategy to develop an affordable childcare scheme in the country

Bill (2015) which are intended to encourage the delivery

Reform Child Benefit so that it is no longer a

tackling the supply side problems in the housing sector

universal payment and redirect consequent savings towards a new national childcare scheme.

Cost: Cost Neutral

7.2 Housing 7.2.1 Housing Housing is a critical part of a country’s physical

infrastructure, and continued shortages of affordable housing in Ireland threatens to undermine the

of high-quality and sustainable housing developments

through reduced regulatory costs and planning reform.

Budget 2016 must continue movement on these issues

and demonstrate a whole-of-government commitment to

“Delay in the supply of new housing is a consequence of a lack of financing into the property development sector, high regulatory costs and delays in the planning process”

achievement of many other policy goals. These include attracting of overseas investment into Ireland, the

promotion of third-level education and maintaining Ireland’s international competitiveness.

The increase in house prices seen across all parts

of Ireland has been a consequence of a significant

imbalance in the supply-demand equation. The story of the decline in house building in recent years is well-

know, but the impact of this shortage of new building activity is only now making its impact felt, as the

7.2.2 Student and active ageing accommodation Building control legislation has removed “bedsits” from the housing stock. This legislation has improved the

standard of accommodation that can be expected by

tenants, but has reduced the availability of affordable

rental properties, especially in urban areas. Students, in particular, have been hit by this shortage of

accommodation. As the number of students increases,

ibec.ie • Budget 2016 - Invest ambitiously

27

Structural and competitiveness issues continued

ever greater demand is placed on the private rental

for the purposes of planning regulations would assist in

university beyond the reach of many potential students.

with the need of occupants in mind, and ensure that

market, driving up rents and putting attendance at

Currently, planning processes and project financing

requirements make it difficult to provide purpose-built

the delivery of sector-specific housing types, designed any VAT or other tax reliefs to support this increased delivery were appropriately targeted.

student accommodation. Universities, city councils and

A twin track approach should be taken of re-classifying

planning requirements and thereby support the financial

planning legislation and introducing a time-limited

planning authorities should work closer together to reform viability of the provision of student accommodation and

rental accommodation, especially for post-graduates and visiting academics and their families.

In addition to Irish students, previous estimates by

Property Industry Ireland show that there are some 11,000 international students and almost 100,000

English language students in Ireland, contributing €1.2

billion to the economy each year. The presence of large

student populations in urban areas without the provision

of adequate accommodation puts pressure on rents and prices driving other renters out of the market.

Two issues are making the provision of student accommodation difficult:

Firstly, student accommodation is not recognised as a specific property type in itself and as such must meet

Planning Regulations and building control requirements for residential accommodation. Current Department

of Education and Science residential guidelines and

standards for third-level students should be revised in tandem with changes to local government apartment

standards, to promote the provision of purpose-built and high-quality, affordable city-centre living for students in term-time.

Secondly, VAT currently cannot be claimed back for

student and active retirement accommodation under

9% VAT rate on these developments for the period of

two years to assist in closing the supply-demand gap.

This would have the dual effect of taking pressure off housing and rents in urban areas with high student

populations and encouraging ‘empty nester’ families

to downsize from larger family homes. This would also have the added benefit of having little attached cost

(due to the current low scale of construction in these

sectors) and being targeted at areas where pressure on housing and rents are greatest.

Recommendation 25: Introduce targeted measures for student accommodation and active retirement housing Reclassifying these accommodation types under planning regulations and reducing the VAT rate

applied to them to 9% would take pressure off urban rents and housing shortages in a targeted and cost effective manner.

Cost: €10 million

7.2.3 Renovation of existing stock

student accommodation projects because it would not be

The Home Renovation Incentive Scheme was initially

treated as a cost of development. Other countries, such

end of the 2015. Ibec believes that the scheme has

possible to pass the cost on to students and is instead as the UK and Australia, have tackled the problem of increasing private sector rents through targeted

reform of the tax base of the student accommodation sector. For example, UK colleges, who compete with

Irish colleges for foreign students, can develop student accommodation units at a zero rated VAT.

Re-assigning student and active retirement

accommodation as separate and specific property types

introduced in October 2013 and is due to expire at the been a success and is worth retaining. The scheme

benefits legitimate businesses and homeowners wishing to improve the quality of their home, and tenants of landlords who have availed of the scheme.

Since the introduction of the incentive, works on some 21,722 properties have been notified to Revenue’s Home Renovation Incentive online system. This

represents more than €458 million worth of works

Budget 2016 - Invest ambitiously â&#x20AC;˘ ibec.ie

Structural and competitiveness issues continued

involving some 5,286 contractors. The total potential

cost to the Exchequer has been modest. This scheme has supported the building material industry in Ireland

and ensured employment for those carrying out works as well as promoted an improved quality of life for

homeowners and tenants through promoting repairs and maintenance, or improvement to energy efficiency of

homes. This scheme should be retained in Budget 2016 for a further time limited period.

Recommendation 26: Encourage landlords to refurbish existing stock Extending the lifespan on the Home renovation

incentive scheme would encourage landlords to

upgrade and maintain existing stock whilst bringing derelict stock onto the market.

Cost neutral

28

29

ibec.ie • Budget 2016 - Invest ambitiously

Tax

Current Expenditure

Productive investment (outside SGP)

Appendix 1: Summary of recommendations and costs

Public sector pay

-

267

-

Demographics

-

275

-

Recommendation 1: Reduce the marginal rate of tax

158

-

-

Recommendation 2: Increase the entry point to the marginal rate of income tax

338

-

-

70

-

-

0

-

-

50

-

-

Recommendation 6: Maintain the 9% VAT rate for tourism

0

-

-

Recommendation 7: Do not introduce discriminatory taxes on food or drink

0

-

-

Recommendation 8: Remove the USC surcharge for the self-employed over the

20

-

-

Recommendation 9: Establish a long term aim of introducing an EITC for the

45

-

-

Recommendation 10: Reform the entrepreneurs’ relief to compete with the UK

30

-

-

Recommendation 11: Reform the EIIS scheme

0

-

-

Recommendation 12: Introduce an equivalent to the SEIS scheme

8

-

-

Recommendation 13: Reform employee share options schemes

0

-

-

Recommendation 14: Introduce an R&D tax credit for small firms

5

-

-

Recommendation 15: Continue work toward introducing a ‘best in class’ KDB

0

-

-

Recommendation 16: Administrative changes to the R&D tax credit

0

-

-

Recommendation 17: Increase capital investment and re-negotiate SGP rules

-

-

800

Recommendation 18: Introduce a regional savings and investment scheme

-

200

-

Recommendation 19: Increase spending on Science Technology and Innovation

-

-

200

Recommendation 20: Introduce a student fees scheme in the medium term and

-

-

-

Recommendation 21: Fund upskilling

-

15

-

Recommendation 22: Establish a ring-fenced fund to support the development

-

5

-

Recommendation 23: Fund teacher training

-

6

-

Recommendation 24: Adopt a medium term strategy to develop an affordable

-

0

-

768

1000

and index personal credits

Recommendation 3: End the third higher rate of tax Recommendation 4: Do not narrow the tax base Recommendation 5: Reduce excise duties

medium term

self employed

reverse cuts to higher education

of new apprenticeships

childcare scheme in the country

Recommendation 25: Introduce targeted measures for student accommodation and active retirement housing

Recommendation 26: Encourage landlords to refurbish existing stock Totals

10 0 734

Budget 2016 - Invest ambitiously â&#x20AC;˘ ibec.ie

30

Ibec is the national voice of business in Ireland. Ibec represents the interests of business in Ireland and provides a wide range of direct services to its 7,500 member companies.

Ibec Economics and Taxation Team

Fergal Oâ&#x20AC;&#x2122;Brien

Gerard Brady

Alison Wrynn

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Senior Economist

Economist

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