Pre Budget Submission 2010
American Chamber of Commerce Ireland Submission to the Department of Finance on The 2010 Budget
For more information please visit our Taxation Working Group page.
There are over 600 US companies employing over 100,000 people directly, and it is estimated that a further 200,000 jobs are indirectly supported by US companies based in Ireland. Latest figures show that total stock of US investment in Ireland is US$146 billion. 
US foreign direct investment (FDI) has been a driver of innovation and research in the private sector. It supports and contributes to Ireland's dynamic enterprise infrastructure through the transfer of technology and commercial know-how, skills development, and through the injection of an ethos of change, innovation, continuous learning and a global perspective into working life.
The American Chamber of Commerce Ireland continues to work with its members to identify how, in the light of our rising cost base and knowledge-based competition, Ireland can implement innovative policies and initiatives which will help us to remain an attractive location for foreign direct investment.
American Chamber of Commerce Ireland
6 Wilton Place
Telephone: +353 1 661 6201
Contact : Brian Cotter, Government Affairs,
Achieving a competitive cost base is necessary to retain and grow employment.
The American Chamber of Commerce Ireland is strongly of the opinion that a competitive cost base is a necessary starting condition for industry to retain and grow employment in Ireland. We believe that there is considerable potential for the cost-base to be re-engineered to maintain high standards of living with greater employment levels. This must be addressed and achieved if Ireland is to retain and win large scale (employment) FDI investments.
Ireland continues to face increasing competition from lower cost economies for FDI. However, its sustained commitment to investment in knowledge and physical infrastructure is successfully transforming our economic aspiration to develop a credible base of industry that is underpinned by research excellence and innovation, and is supported by world class infrastructure.
Hence, the American Chamber of Commerce Ireland believes that to address Ireland's fiscal challenge in a sustainable, pro-job creation manner - Government budgetary policy must be biased towards cost control and productivity improvement measures to enhance competitiveness.
Given a competitive cost base, the American Chamber believes that there is significant opportunity for an innovation-led industrial strategy focused on creating enterprise and jobs in high-value, export-led sectors making use of research, science and technology with significant tax and investment incentives bias.
We welcome the Government's commitment to sustaining Ireland's corporation tax rate at 12.5%. Our priority in this submission is to recommend incentives that retain jobs; increase competitiveness; encourage innovation and prepare the foundations for new investment and employment.
RETAINING CORPORATE INVESTMENT
The American Chamber of Commerce Ireland reaffirms its view that Government should be consistently vocal in declaring that Ireland's corporation tax regime will be sustained as a legitimate low-tax jurisdiction with a rate of 12.5%. Certainty is a valuable tool in a volatile international tax and investment environment.
Research and Development (R&D)
There is widespread consensus that consolidating and sustaining the industry base requires a vibrant innovative environment. The credibility of ‘Innovation Ireland' is reflected in its reputation for research, discovery and development of innovations in technologies, processes and products/services that evolve into new applications for use by industry. Moreover, subsidiaries of multinationals actively pursuing R&D deepen their importance to their own Corporation and develop their local mandates into new areas with positive benefits for jobs and sustained long term investment.
However, in this context it is of concern that Ireland's rate of R&D expenditure this decade has consistently lagged behind those of EU and OECD averages. Given the current economic and fiscal challenges it is critical that those promoting investment in R&D projects have a compelling incentive-led case to sustain jobs and win new projects. Building on 2009 reforms to the R&D Tax Credit Regime the American Chamber recommends:
- 1) Allowing the R&D Tax Credit as a Set-off Against Payroll Taxes.
- 2) The Elimination of a Base Year as a basis for the R&D Tax Credit Assessment.
- 3) Improving the rules for the double tax relief attaching to inbound royalties
- 4) The abolition of withholding tax on patent royalties
In addition, the American Chamber of Commerce would be concerned at any move to repeal the exemptions on patent royalties, as they perform a useful role in retaining and attracting research and development investment.
R&D Tax Credit as a Off-Set Against Payroll Taxes is Necessary
Having ‘flexibility' built into the application of the R&D Tax Credit regime is desirable so that its use can flow to all forms of prescribed innovation activities. It must also take into account different corporate business cycles and structures. As well as providing enhanced incentives for new investment, it should be focussed on helping to retain existing investment in Ireland. Hence we again recommend that the R&D tax credit must become a "transportable" credit, capable of being off-set against either Corporation or Payroll taxes.
Consideration should be given to influencing key R&D decision makers (Chief Science or Technology Officers and R&D Project Leaders, etc.) by reducing the project costs through converting the credit from a corporate tax off set to a payroll off set (PAYE/PRSI). The objective is to allow subsidiaries of multinationals to book the tax credit ‘above the line' against labour costs on a quarterly basis, thus enhancing Ireland's competitive position in comparison with other inward investment locations. We recommend consultation with industry to ensure that any reform is designed in a manner that has the desired impact, while complying with the relevant set of Generally Accepted Accounting Principles being used by corporations.
A Volume Based System is Very Desirable
In order to recognise the long term nature of R&D investment projects a move from the current incremental system to a volume based system is desirable. The constant momentum and turnover of R&D projects means that activities conducted before the base year have evolved to meet today's business needs.
R&D activity is one of continuous innovation not incremental steps. This reform to a volume based system would increase the certainty of the tax credit from a business perspective and deliver improvements in the regime as follows:
- It would allow companies to be forward looking in terms of winning new R&D projects and not be penalised for any significant prior investment.
- It would benefit companies with sustained research activity and facilitate those that may be forced to reduce expenditure levels in more restrictive economic conditions
- It would reduce the administration and compliance costs of the incremental system
Improve the Rules for Double Tax Relief on Inbound Royalties
Under the current double tax relief system, limitations on relief for foreign withholding taxes can result in tax rates in excess of 100% on royalty profit margins and restrict recovery of, what is in effect, a second tax. To make Ireland competitive in this critical area, we recommend amending these tax rules to improve the measure of double tax relief attaching to inbound royalties. Such improvements could include relief for non-treaty royalty withholding taxes and pooling and carry forward of excess foreign royalty withholding taxes indefinitely.
Abolish Withholding Tax on Outbound Royalty Payments
In many cases, outbound royalty payments (e.g. non-patent royalties), do not suffer Irish withholding tax, adding to Ireland's attraction as a location in which to base intellectual property (IP) licensing and exploitation functions. This position could be significantly improved by the abolition of withholding tax on patent royalties, thus placing Ireland on a more equal footing with our key competitors.
Retain the Tax Exemption on Patent Royalties.
The tax exemption on patent royalties is a very useful incentive in attracting and sustaining innovation-led investments for Ireland. It can be used positively to re-invest in businesses/technologies that are often in their infancy or in their early growth stage of development. The American Chamber would not support its repeal, as this is an important competitiveness tool in attracting intellectual property investment into Ireland, as well as providing an incentive to the inventor-enterprise community.
Attracting Skilled Migrant Workers & Entrepreneurs
The ability of countries to attract (or at least not deter) highly skilled migrant workers and international entrepreneurs is a significant component in economic development. Irish personal tax rates and marginal rates in particular, are rising in comparison with most other developed countries. This, together with an infrastructure deficit and a high cost of living act, together as a deterrent to selecting Ireland as a place to live and work.
As a result, key workers tend to favour other jurisdictions (particularly Switzerland) in comparison with Ireland. These individuals are often key influencers in the foreign direct investment decisions of MNCs so that their loss to the Irish economy has major long-term consequences. We urge the Minister to sustain and enhance an attractive system of tax reliefs targeted at these workers.
Furthermore, consistent with the American Chamber's presentation to the Commission on Taxation, we recommend restraint in the introduction of higher tax burdens on those on or below the industrial average income levels. Such additional burdens directly feed into upward pressure on the wage bill at a time when the entire export sector is seeking to reduce or restrain its cost base and increase its productivity.
Reinstate Employer PRSI Ceiling
Currently there is no ceiling on the amount of PRSI employers must pay in respect of employee salaries/benefits. This has resulted in considerable additional costs for employers. In this challenging time for the Irish economy, we recommend that the ceiling for employers' PRSI be reinstated to minimise the costs associated with maintaining existing employment levels, as well as assisting in attracting new inward investment.
The Value of Employee Benefits Must Be Protected.
Consistent with our theme of competitiveness, we would be particularly concerned at proposals to extend a PRSI charge to share based remuneration as advanced by the Commission on Taxation. Such a development would in effect raise the future burden of taxation on employees, and hence add upward pressure on costs as the value of those benefits declines. As the variety of schemes in operation and their structure is a complex area, the American Chamber of Commerce recommends that an advanced period of consultation is required before considering any reforms.
Environmental Incentives Should Aid, not Hinder Competitiveness
Ireland already raises more taxes from Environmental sources (energy, transport, pollution) that the average EU 15 in advance of any consideration of a carbon tax. The price of energy to Irish industry has more than doubled during this decade making it the biggest contributor to the cost base after wages. Ireland's ability to continue to attract foreign direct investment is impacted by Ireland's capacity to deliver a secure and sustainable energy supply at a competitive cost. Ireland's electricity costs were 35.5% higher than the EU-27 average in the second half of 2008 and it is clear that any taxation on energy must not increase this already high burden.
While Ireland rightly wants to show leadership in its global responsibilities, we must remember that many jobs depend on investments that compete with jurisdictions that remain vague in their commitment to some of the leading international protocols on climate change. Also, dramatic changes in Ireland's emissions will have minute impacts on global targets. To build our competitiveness the American Chamber has consistently argued that it is important that carbon or polluter taxes under consideration do not add to the overall burden of taxation, but rather shifts that burden in order to meet public policy objectives and international commitments.
The American Chamber proposes a Carbon Tax meet the following criteria:
- As recommended by the National Competitiveness Council,  the rate of the tax should be set relatively low (below the €20/tonne CO2 proposed by the Commission on Taxation), and phased in, allowing for an adequate period of adjustment.
- As advocated by both the ESRI and National Competitiveness Council, measures should be implemented utilising the revenues of a Carbon Tax to improve Ireland's cost competitiveness.  Funds should be directed towards improving energy costs via the enhancement of energy efficiency through the governments National Energy Efficiency Action Plan. Revenues should also be used to assist in the reduction of labour costs via offsetting revenues against a reduction in income tax or employer social insurance costs for firms outside the European Emissions Trading System (ETS).
- The Chamber would welcome the exemption proposed by the Commission to companies participating in the ETS, however given the low uptake of the Scheme, more information should be provided to relevant bodies to assist them in assessing the benefits, or otherwise of participation.
The American Chamber strongly believes that the creation of a Carbon Tax must not impinge on Ireland's international Cost Competitiveness and therefore would urge any proposals to be derived in consultation with the National Competitiveness Council.
BUILDING TOMORROW'S EMPLOYMENT BASE
The Government needs to take proactive measures to ensure Ireland's knowledge base meets the needs of the SMART economy. Ireland needs to be well positioned to take advantage of any economic upturn. The American Chamber feels that investment and commitments are required in supporting the SSTI, Education and Upskilling to make this a reality.
The Strategy for Science Technology and Innovation (SSTI)
While Ireland continues to face increasing competition from lower cost economies for foreign direct investment, its Strategy for Science, Technology and Innovation (SSTI) has successfully transformed our economic aspiration to develop a credible base, in a global context, of research and innovation. We share its underlying and critical objective that this investment in our future must create economic success.
- The Government must make clear its long-term expenditure commitments to the SSTI to sustain its credibility as the evidence of Ireland's evolution to an ‘Innovation Island' - especially in the current budgetary climate.
- The American Chamber is concerned that the proposed reduction in spending of €100m recommended in the Report of the Special Group on Public Service Numbers and Expenditure Programmes will negatively impact the strategy's successful implementation.
- The upgrade of existing research infrastructure; the development of new facilities; and the creation of sustainable and attractive career paths for researchers (especially those supporting Principal Investigators), has to happen at the appropriate critical-path to match our ambitions.
Ireland Must Start to Win New Manufacturing/Services Mandates Again
Encouraging multinationals to create and locate Intellectual Property (IP) within Ireland is currently an important challenge. The enhanced incentive package in the 2009 Finance Act to locate IP in Ireland is a significant first step in making Ireland the jurisdiction of choice for the location, creation and trading of intellectual property. This in turn has the potential to seed new FDI-led operations and enterprises in Ireland.
The American Chamber has recommended that Ireland develop new incentive vehicles to provide additional reliefs, specifically devised to encourage the creation of new foreground IP via R&D investment in prescribed activities aligned to Ireland's SMART ambitions. The objective is to catapult collaborative arrangements between entities (FDI, indigenous enterprise, State bodies and research institutes), in the use of IP that can be licensed to a wide pool of industry participants.
Recognising that this kind of incentive can be the most important factor in the creation of the new venture, we have recommended that we need to find other innovative ways to link the tax relief to commercial success. In turn, we believe this would lead to the formation of new indigenously-based, export enterprises of scale in terms of value and employment. This kind of incentive will provide a key tool to stimulate and differentiate those new ventures without direct state investment.
Creating a safe environment for developing and licensing IP, including effective disclosure and management, is a basic requirement of the commercialisation infrastructure and eco-system. This will require the development of Ireland's legal and commercial court infrastructure to support collaborative arrangements in a SMART economy.
Ireland's Education System is Key
Ireland's education system's ability to delivery excellent education outcomes is the foundation to Ireland's sustained economic and social development, particularly when one considers that Ireland has the highest birth rate in Europe. In 15 years time, this will once again be a key competitive advantage providing this new workforce has the skills required by industry.
Enhancing education in Science and Mathematics at all levels is required to ensure Ireland's readiness for growth. Mathematic and Scientific literacy in Ireland ranks poorly in the OECD PISA report at 16th and 14th respectively and there has been a five place drop in science since 2000. This trend must be reversed to ensure that the Irish labour force is enabled for the SMART economy based on technology platforms, work flexibility, enterprising behaviour and constant change and innovation. Hence expenditure in the 2010 budget should:
Give Priority to Primary Education
- Allocation of funding to ensure that the current standard of primary education in Ireland is not diminished in the context of a growing population. Within this, it is well understood that the primary gap in achieving better education, social and economic outcomes across all family income groups is access to pre-school and early education interventions for Ireland's youngest citizens.
- A higher proportion of tuition hours must be spent on the key skills of maths, science and technology at primary level, where presently Ireland ranks among the lowest in the OECD.
- The American Chamber welcomes the commitment in the Renewed Programme for Government (October 2009) for the recruitment of new teachers.
Focus on the Quality of Delivery at Second Level
Under the present fiscal circumstances the education system in its entirety needs to be as productive as possible. Innovative thinking and resource flexibility in the delivery of education services must be the driver of improved outcomes. We continue to call for:
- An increase in the number of teachers leading classes in the physical sciences and mathematics at second level, who have, or who are pursuing a suitable level of qualification to deliver these courses at advanced levels.
- An increase in the number of teachers being trained to use and optimise new and existing (ICT) technology as teaching tools in the classroom and in their management of schoolwork, given that just 5% of teachers are deemed has having the optimal level of performance for use of ICT in teaching. There is a significant danger that teachers will be overtaken by their students in the use and application of new technology given the pervasive use and uptake of gaming, communications and internet tools among this current generation. This could lead to a frustrating disconnect and credibility gap between students and the education delivery system.
- Continued Government commitment to introduce 100mbs broadband to all schools by the end of 2010. In order to fully utilise this resource an increase in the number of computers per student in schools is required at all levels, a ratio of 5:1 should be pursued bringing Ireland in line with recognised international best practice.
- An increase in the number of schools with access to suitable science laboratory facilities to support engaging experimentation and demonstrations consistent with the current curriculum for sciences.
- In particular, the American Chamber calls on the Government to maintain its commitment to investing €5b in its NDP Schools Modernisation & Development programme, and to offer a detailed plan on how this programme will be implemented.
- Resources have to be in place to conduct suitable independent assessments of teaching and delivery outcomes that are fair, objective and lead to constructive improvements. The importance of quality delivery is paramount. Good performance in education delivery and outcomes over the long term should be recognised and rewarded.
Recognising that Education is a Life Long Investment for the Economy
With 60% of today's workforce expected to be working in 2020 and beyond there is a real challenge in stepping up skills through life-long learning. Initiatives in Life Long Learning and Upskilling can make a significant contribution to the research base. In this context we believe that Government need to address the issues of displaced income and leave entitlements, to support a significant programme to up-skill those in the workforce in targeted areas of engineering, science and mathematics.
The American Chamber welcomes initiatives in the Supplementary Budget 2009 to provide 128,000 activation and training places for the unemployed, however further initiatives and incentives are required to encourage upskilling of individuals currently in employment.
- Ireland has yet to address in a meaningful manner the issue of displaced income for those considering a return to education.
- The American Chamber has proposed that 30,000 people annually should be encouraged to study for undergraduate and post graduate courses. To do that a system of personal tax rebates for third and fourth level qualifications (based on taxes paid over a minimum of five years prior to the commencement of study) should be introduced to entice people to invest in their own knowledge capital.
Recognising that adult participation in life-long learning in Ireland is well below the top performers in the EU this is a crucial area where the taxation system can lead dramatic change via innovative tax-credit initiatives.
COMPETITIVENESS = WORLD-CLASS INFRASTRUCTURE
Ireland's attractiveness as a location for Foreign Direct Investment is being enhanced by improvements to its physical infrastructure in the areas of communications, energy and the road network. As a small open economy with a high cost base, Ireland must have world-class infrastructure to facilitate higher levels of productivity.
Ireland's investment in its information, communications and telecommunications infrastructure is of strategic importance to the FDI community, because of its significance in accelerating the productivity and innovation promises that information technology brings to both business and society.
The American Chamber welcomes the Government's commitments to enhancing Ireland's current communications infrastructure as outlined in the Next Generation Broadband (NGN) Report published by the Department of Communications, Energy and Natural Resources. We strongly agree with the assessment that the slow pace of investment in telecoms infrastructure this decade delayed the rollout of broadband. If this mistake is repeated in the next decade Ireland will miss the leap to NGN based services. This risks adding further disadvantage to applying new technologies in education, healthcare and energy management which have potential to make Ireland more competitive and productive.
If Ireland is to be credible in its claim to be a SMART economy it must address NGN in terms of the provision of the high speed (150Mbt+) and world class quality connections to a wide population. Users must have the connection capable of carrying the vast quantities of data that evolving applications will demand as witnessed by the capacity planning for data centres. Bandwidth in the next decade will become omnipresent, becoming as important a piece of infrastructure as those supporting roads, water and electricity to the home/office. Network quality as measured in response times and congestion is an ever increasing importance to industries such as gaming and financial services.
The American Chamber notes a well published survey conducted by Said Business School at University of Oxford and the University of Oviedo's Economics Department that found Dublin ranked 87th in the world for quality of broadband and Ireland ranked 39th out of 60 countries. Broadband quality is fundamentally linked with educational achievement and to the nation's advancement as a knowledge economy.
Hence the American Chamber recommends that resources in the 2010 Budget for Communications support:
- A new commitment by government to the deployment of open access fibre based infrastructure within five years. In the current fiscal environment innovative thinking is required and the American Chamber welcomes the Department's openness to consider new incentive based schemes to encourage investment.
- Regulation and incentives to compel the installation of open fibre connections into buildings, within urban blocks/towns, suburban communities and rural catchments areas where practicable.
- The establishment of the promised "one-stop shop" for State broadband infrastructure is to provide service providers with integrated access to State-owned infrastructure.
- The completion of the National Broadband Scheme ahead of plan and within budget.
- The speedy completion of Project Kelvin to enhance Ireland's international connectivity, which would be of benefit to the FDI base.
- The implementation to the Broadband to Schools initiative, to ensure that second-level students throughout the country acquire the skills necessary for participation in the SMART economy.
Government must commit to maintaining its investment in key public infrastructure projects which will provide businesses with suitable access to global markets. This is particularly important for businesses operating in the regions outside of Dublin.
- The Chamber welcomes the sustained commitment to the completion by 2010 of the major inter-urban (MIU) road routes linking Dublin with Belfast, Cork, Galway, Limerick and Waterford.
- The Chamber is actively seeking a commitment to the timely completion of the N5 to support important high value jobs and investments in the Mayo region and the planned Atlantic Road Corridor linking Ireland's key Gateway locations. Mayo has a portfolio of world-class foreign direct investment the manufacturing companies which employ 3,000 people directly and a further 6,000 in indirect employment. For these businesses the sub-standard N5 east-west link is a direct threat to jobs in the region.
- Similarly the Chamber is seeking a renewed commitment to the Cork-Shannon road route, to enhance the transport links both locally and internationally by enhancing road infrastructure to Shannon Airport. To sustain its remit to provide transatlantic services Shannon Airport must widen its catchments area and this project will positively impact the business case for air services to the US out of Shannon Airport.
- The National Development Plan's Roads Sub-Programme signalled a commitment to continued upgrade of road links to Northern Ireland. Within that context, the upgrade of the Dublin - Derry road is a priority for US firms in the North West as an important economic artery linking Ireland's fourth largest city and cross-border hinterland with the Dublin region.
The price of energy to Irish industry has more than doubled during this decade making it the biggest contributor to the cost base after wages. Ireland's ability to continue retaining and attracting high levels of foreign direct investment is impacted by Ireland's capacity to deliver a secure and sustainable energy supply at a competitive cost.
- The American Chamber has called on the Government to state a target for reductions in the cost of gas and electricity production and delivery to business. The Chamber endorses the recommendations made by the National Competitive Council (October 2009), on seeking efficiency gains in both gas and electricity markets. Furthermore, the Chamber's members are strongly of the view that energy prices and tariff structures must be transparent to ensure that prices are fully cost reflective. Non-fuel cost structures should be aligned with international benchmarks for the cost of producing and delivery of energy.
- The American Chamber welcomes the progress on the East-West Inter-connector and calls for a Government commitment for its conclusion by 2012.
 Bureau of Economic Analysis (2008) at the US Department of Commerce.
 National Competitiveness Council (2009), ‘Statement on Energy,' pg 96
 National Competitiveness Council (2009), ‘Statement on Energy,' pg 26
 ESRI (2008), ‘A Carbon Tax for Ireland,' Pg. 7
 Department on Finance (2009), ‘Report of the Special Group on Public Service Numbers and Expenditure Programmes,' Pg. 15
 Ref : American Chamber of Commerce Ireland Submission to the Innovation Task Force, September 2009, Department of An Taoiseach.
 Deparment of an Taoiseach (2008), Building Ireland's Smart Economy
 National Competitiveness Council (2009), ‘Annual Competitiveness Report 2009: Volume 1 Benchmarking Ireland's Performance' Pg. 27
 National Competitiveness Council (2009), ‘Annual Competitiveness Report 2009: Volume 1 Benchmarking Ireland's Performance' Pg. 28
 National Centre for Technology in Education, Technology Integration Initiative (http://www.ncte.ie/NCTEInitiatives/TechnologyIntegrationInitiative/)
 National Development Plan 2007-2013 Pg. 196
 National Competitiveness Council (2009), ‘Statement on Energy,'