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Shannon Development submits that tax incentives can be targeted in

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Shannon Development submits that tax incentives can be targeted in

    SHANNON DEVELOPMENT

    SUBMISSION TO COMMISSION ON TAXATION

    MAY 2008

1. BACKGROUND.

    Shannon Development was established by the Irish Government in 1959 to promote Shannon International Airport. In the decades since then the Company’s mandate has grown to encompass the economic development of the wider Shannon Region which includes counties Clare, Limerick, North Tipperary, South Offaly and North Kerry. As Ireland’s only dedicated regional economic development agency Shannon Development has extensive experience of driving economic development across multiple sectors and activities.

    Shannon Development’s current mandate as defined by the Ministers for Enterprise, Trade and Employment, and Arts, Sport and Tourism is:

    ; Ensure that the more developed areas of the Shannon Region reach their full

    potential.

    ; Address the needs of the less developed areas of the Region.

    ; Create demand for Shannon International Airport, and

    ; Deliver on a new vision for tourism in the Shannon Region.

Shannon Development’s vision is that the people of the Shannon Region, and its

    investors and visitors, will live, learn, work and play in one of the most exciting and forward thinking places in the world. Our current key projects illustrate how we work to realise this vision and include:

    ; The Shannon Development Knowledge Network a cluster of five

    technology business parks linked with third level institutions in the Region st; eTowns a project to develop a 21 century model for developing smaller

    communities in the Region.

    ; Shannon Broadband a partnership with local authorities to develop a

    world class telecommunications infrastructure in the Region.

    ; Kerry Deepwater Zone utilising a 600 acre site on the Shannon Estuary

    for the importation of Liquefied Natural Gas and other large scale marine

    based industry.

    ; Property Development using the extensive Shannon Development

    property portfolio to provide property solutions for Irish and overseas industry.

    ; Tourism Development acting as the Regional Tourism Authority to

    promote the Shannon Region as a leisure and tourism destination and

    develop a new generation of tourism products and concepts.

    This breadth of activities gives Shannon Development an appreciation of the challenges faced by public bodies in attempting to stimulate economic activity in an

    Shannon Development May 2008 economy where the underlying economic forces are not always conducive to spatial balance. Shannon Development recognises the value in having a broad range of policy instruments available to support us in implementing our mandate. Based on our experience, regional economic development requires a multi-pronged approach using a range of policy instruments.

    The key point in our submission is that flexible policy instruments that can be applied selectively on a geographic or sectoral basis are valuable tools of public policy. Tax expenditures can provide this degree of flexibility and should, in our view, remain part of the array of instruments available to the State in implementing public policy. This submission is therefore mainly concerned with point d in the Commission’s Terms of

    Reference. We will provide examples in this submission of how tax expenditures can contribute to achieving better balanced spatial development in Ireland, which is a key objective of Government policy.

2. SUPPORTING ECONOMIC ACTIVITY AND PROMOTING INCREASED

    EMPLOYMENT.

    First we will make some general points about taxation policy from a regional perspective, addressing point a in the Terms of Reference on how the tax system

    can best support economic activity and employment in Ireland. The performance of the national economy is critical in determining performance at regional level, notwithstanding the inevitable spatial imbalances that will occur over time in a market economy. Shannon Development recognises the positive impact that Ireland’s strong

    economic growth over the past two decades has had on employment and living standards in the Shannon Region during this period.

    Macroeconomic performance is a key determinant of regional performance. Strong regions make for a strong national economy and growing national prosperity enables regions to perform to their full potential. This has been the case in the economic transformation of the Shannon Region since the 1960s where regional performance has mirrored that of the national economy. Shannon Development’s experience of

    promoting regional economic development has made us very aware of the central role played by Foreign Direct Investment (FDI) in transforming the Irish economy and the positive impact that FDI has had on our Region over the past five decades. The close link between FDI and corporate taxation in Ireland has also been evident to us in the Shannon Region during this time.

    The role of corporate taxation in attracting FDI to Ireland has been well documented. The introduction of export sales relief in the 1950s provided the impetus for attracting the first wave of FDI to Ireland in the 1960s and 1970s. Shannon Development used this tax incentive when we began promoting the Shannon Free Zone as a location for FDI in the late 1950s and it proved a crucial factor in the Free Zone’s subsequent success as a location for inward investment. Subsequent FDI flows played a key part in the modernisation of the Shannon Region’s economy, with significant clusters of

    inward investment building up at Raheen Business Park near Limerick City and the National Technology Park beside the University of Limerick campus.

    Shannon Free Zone is a key driver of economic activity and employment in the Shannon Region. A total of 110 companies operate in the Shannon Free Zone, employing 7,200 people and generating ?3.3 billion in annual sales, of which 90%

    Submission to Commission on Taxation 2

    Shannon Development May 2008 are in export markets. The success of the Free Zone is due in large part to FDI flows, which have stimulated economic activity and employment in the Shannon Region and the West of Ireland since the late 1950s.

    The Shannon Region is a visible example of the role that FDI has played in modernising the Irish economy. This Region has been a major beneficiary of FDI over several decades and we are positioning ourselves to benefit from the next generation of inward investment that will drive future economic growth in the Region. Research on the link between corporate taxation policy and FDI flows has shown that Ireland’s stock of US manufacturing investment is 70 per cent higher than would

    have been the case if Ireland had a tax rate equal to the next lowest rate in the EU. Corporate taxation policy is therefore going be a key factor in determining Ireland’s future success in attracting inward investment.

    Shannon Development continues to promote the Shannon Free Zone as a location for FDI, working in partnership with the IDA, and we recently completed a Masterplan setting out our vision and priorities for the Free Zone for the next twenty years. Our future success in implementing this Masterplan and achieving our vision for the Shannon Free Zone will be crucially dependent on securing a flow of FDI projects in high value-added manufacturing and international services. We can only achieve this in an environment where Ireland continues to attract relatively high volumes of new FDI. National economic performance will therefore be a key determinant of the future success of the Shannon Free Zone.

    Attracting new FDI flows will be crucially dependent on Ireland retaining its current corporate taxation regime. The IDA describes Ireland’s current regime as among the most beneficial corporate tax environments in the world. This is a unique advantage in attracting FDI inflows to Ireland and one that we believe should be retained in our long term economic interest. The 12.5% rate of corporate tax on trading profits, coupled with the other advantages of the Irish taxation system from an enterprise viewpoint, are fundamental to attracting and retaining high value-added inward investment and sustaining economic prosperity in Ireland in the long term. Maintaining our current corporate taxation regime should therefore be a priority for Irish public policy as it is an essential enabler of future economic growth.

    This will be especially important if the EU Commission decides at some point in the future to propose minimum corporate taxation rates for EU member states following its previous proposal to move to a common tax base. From an Irish point of view any attempt to restrict national sovereignty with respect to corporate taxation rates is unacceptable and needs to be strongly resisted.

    The economic case for uniformity in corporate taxation within the EU is unproven. Further, in light of EU policy on state aids and Ireland’s membership of the single

    currency, the range of policy instruments available to respond to economic and social challenges has been considerably reduced. Taxation policy is one instrument that remains available to national governments to cope with these challenges, and Ireland needs to retain its sovereignty in this key area.

3. TAX EXPENDITURES AND SPATIAL ECONOMIC PERFORMANCE

    Submission to Commission on Taxation 3

    Shannon Development May 2008 The costs and benefits of tax expenditures have been the subject of public debate for some time and in 2004 the Minister for Finance announced a detailed review of some tax incentive schemes in his Budget Statement. The debate on tax expenditures has focused on their costs to the Exchequer as measured against the benefits which they generate. These benefits are typically focused on market failures, or market inequities, both of which can lead to less than optimal public policy outcomes. Spatial imbalance is one effect of market failure. Social exclusion, arising from distributional inequalities, is one result of market inequities.

    A key advantage of tax expenditures as a policy instrument is that they can be designed to target specific geographical areas and help to alleviate the spatial imbalances to which market failure can give rise. Further, they can also be targeted at market inequities and used to tackle social exclusion as part of an integrated package of public policy interventions.

    Shannon Development contends that tax expenditures can be targeted in specific geographic areas to help achieve the national policy objective of balanced regional economic development. The option of deploying tax expenditures to support spatial development should be retained as a policy instrument and used appropriately to stimulate higher levels of economic activity than would otherwise be the case. The flexibility afforded by tax expenditures can be an important policy instrument when the objective is to stimulate economic activity in specific geographic areas.

    The case for spatially based tax expenditures centres on their flexibility and their ability to be targeted in areas in need of economic stimulus. They can used as the primary policy instrument in these areas or as part of a larger package of measures designed to achieve a desired outcome. From a spatial perspective tax expenditures can be targeted in rural and urban areas to stimulate economic activity in general or to encourage specific sectors or activities in these areas. This flexibility is an important advantage when public policy is required to respond to cases of economic underperformance in defined geographic areas.

3.1 Mid-Shannon Corridor Tourism Infrastructure Investment Scheme

    To illustrate the flexibility that tax expenditures can provide in stimulating regional economic development the following paragraphs outline the Mid-Shannon Corridor Tourism Infrastructure Investment Scheme which is specifically targeted at promoting investment in new tourism infrastructure in a rural area of the Shannon Region. This scheme was included in the Finance Act 2007 and Shannon Development was involved from an early stage in making the case for the introduction of this tax incentive.

    The Mid-Shannon Corridor Tourism Infrastructure Investment Scheme shows that tax expenditures can be used to target specific geographic areas while focusing on a specific sector - in this case tourism - to stimulate improved economic performance. Shannon Development made a detailed submission to the Department of Finance in 2005 on the case for extending the Rural Renewal scheme to the Shannon River Corridor (SRC). The rationale for our proposal was to stimulate economic activity and employment growth in an area that was underperforming on most economic and demographic indicators over an extended period of time.

    The key features of the tax expenditure proposal submitted by Shannon Development were:

    Submission to Commission on Taxation 4

Shannon Development May 2008

    ; The tax expenditures would apply only in defined geographic areas of the

    SRC.

    ; Each area would have an agreed integrated development plan consistent

    with national tourism and environmental policies.

    ; Tax expenditures would be confined to sustainable tourism projects in

    each area.

    ; Larger urban areas and activities such as the building of private dwellings

    and holiday homes would be excluded from availing of tax expenditures.

    ; The proposal would be time limited five years and an overall cap would

    limit the amount of tax foregone.

    ; Successful projects would have to contribute to a marketing fund on a pro

    rata basis.

    Shannon Development made the proposal for the SRC in the context of our regional economic development mandate and our focus on new tourism products as a key tool of economic development in rural areas of the Shannon Region. As the rural economy undergoes economic restructuring it is becoming clear that tourism offers a sustainable source of economic activity and employment for many rural areas. Shannon Development has successfully used new tourism products to stimulate less developed areas of the Shannon Region. The SRC presented an opportunity to develop new tourism products and attractions in another part of the Region with the potential to benefit from sustainable tourism.

    The Department of Arts, Sport and Tourism in its submission on the proposed SRC Incentive Scheme supported the proposal on the basis that it was consistent with Government policy on balanced regional development and its commitment to the development of tourism as a key indigenous economic sector in Ireland. The Department noted that the twin objectives of spatial balance and sectoral development are not always easy to achieve but that An appropriate State

    incentive scheme with a stronger environmental emphasis could help the SRC

    carve out a niche for itself in environmentally sustainable tourism.

    This Mid-Shannon Corridor Tourism Infrastructure Investment Scheme is an example of how tax expenditures can be targeted at specific geographical areas and sectors

    in this case both simultaneously - to achieve desired public policy outcomes. From a regional economic development perspective it is important to have an instrument with this flexibility available to address specific instances of spatial and sectoral imbalance.

It is also important to note that tax expenditures should ideally be deployed as one

    component of a wider package of measures to achieve the desired public policy

    outcome. By definition tax expenditures are targeted at the private sector and are designed to stimulate new or additional commercial investment. In most economic development initiatives at local or regional level these measures are usually accompanied by public sector interventions such as investment in new infrastructure or other measures designed to stimulate activity in specific sectors.

3.2 Limerick City Regeneration Project

    The Mid-Shannon Corridor Tourism Infrastructure Investment Scheme has been implemented by the Government and is currently operational. A further tax incentive

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Shannon Development May 2008

    scheme that could be considered by Government is described in the next section of this submission. This scheme would be targeted in a very different geographic area

    socially and economically deprived areas of Limerick City and would have different

    objectives in this case stimulating economic activity and employment as part of a wider programme of social and economic regeneration.

    The Limerick City regeneration programme which was launched by the Government in 2007. The Government decision to implement this programme followed a report on Addressing issues of Social Inclusion in Moyross and other disadvantaged areas of Limerick City prepared by Mr. John Fitzgerald for the Cabinet Committee on Social Inclusion. The report recommended a three strand approach to tacking these social exclusion issues, including the economic and infrastructural regeneration of the affected areas.

The Government endorsed the analysis and recommendations in Mr. Fitzgerald’s

    report and expressed its commitment to delivering the regeneration programme. Local authorities and other relevant state agencies will work with central Government to implement the regeneration programme and provide the integrated policy response from the public sector that is called for in the report.

    In the case of economic and infrastructural regeneration the Fitzgerald report recommended that Serious consideration be given by the Departments of

    Finance and Environment, Heritage and Local Government to utilising the scope currently existing under the Regional Aid Guidelines 2007-2013 to establishing fiscal incentives to develop these areas and other marginal lands that have development potential in these areas of chronic social disadvantage.

    The report also recommended that these incentives be linked to an overall strategy for the Gateway of Limerick-Shannon and the prioritising of the regeneration areas for investment and development by the relevant public sector agencies, including Shannon Development.

    The Fitzgerald report proposed the establishment of two regeneration agencies to drive economic and infrastructural development in the Northern and Southern areas of Limerick City. These agencies were subsequently established by the Government and have begun their work of leading the physical, social and economic regeneration of the targeted areas. There is strong commitment by Government and local stakeholders to achieve the desired regeneration of these socially disadvantaged areas of Limerick City and this will represent a significant challenge to the public and private sectors in the years ahead.

    The public sector will be required to deploy a range of policy instruments in an integrated manner to achieve Government objectives for the regeneration of these areas of Limerick City. The commercial components of the programme will be primarily delivered by the private sector. However public policy will be required to enable and support private sector activity in the regeneration areas and tax expenditures are one of the instruments that the public sector can deploy to support private investment.

    Shannon Development supports the recommendation in the Fitzgerald report that fiscal incentives should be considered as one of the instruments deployed to support the economic regeneration of these areas of chronic social disadvantage. The key

    Submission to Commission on Taxation 6

    Shannon Development May 2008 objective of the economic regeneration drive will be employment creation in light of the high rates of unemployment currently prevailing in these areas.

    In these circumstances the appropriate tax expenditures could be targeted to promote higher levels of employment and labour force participation in local areas with high levels of unemployment. Reductions in payroll taxes combined with adjustments to social welfare benefits could be trialled on a pilot basis for defined time periods to promote employment creation and create viable local labour markets in these areas which have largely remained unaffected by Ireland’s economic

    success over the past two decades.

    The principle of using tax expenditures to support urban regeneration was recommended by Goodbody Economic Consultants in their Review of Area-Based Tax Incentive Renewal Schemes in 2006. The Review recommended that The

    option of using tax incentivisation as a tool of urban renewal be retained and

    Any such schemes [should] be targeted on a small number of that in future

    town and urban black spots. The Limerick City regeneration programme clearly

    falls within these criteria and the use of tax expenditures to support the economic regeneration of the disadvantaged areas of Limerick City identified in the Fitzgerald report remains a viable option for public policy.

    The Limerick City regeneration programme represents a major challenge for the Irish public sector in delivering an integrated and coherent policy response to endemic issues of social and economic exclusion in specific geographic areas of the State. A full range of policy instruments will be required to deliver the desired outcome and tax expenditures should form part of the policy response to ensure that the private sector becomes fully engaged in the regeneration programme.

4. CONCLUSION

    The Irish taxation system has been supportive of economic growth and development over the past two decades. Fiscal policy remains an important factor in determining Ireland’s economic performance in a global environment that is becoming increasingly more open and competitive. Maintaining sovereignty over corporate taxation will be critical to Ireland’s future success in this competitive global economy with FDI flows maintaining their importance as drivers of economic growth. National policy should therefore be firmly focused on maintaining Ireland’s present corporate taxation regime.

    Shannon Development believes that the examples of the Mid-Shannon Corridor Tourism Infrastructure Investment Scheme and the proposed Limerick City regeneration programme illustrate the point that tax expenditures can be effective instruments of spatial and sectoral development in Ireland. Tax expenditures can be targeted in defined geographic areas and in specific sectors, providing a degree of flexibility that few other policy instruments can match for an equivalent administrative effort.

    From a regional and local economic development perspective, therefore, there is a clear case for deploying tax expenditures as policy instruments, especially in areas of acute underperformance or unrealised potential. Tax expenditures on their own may not be sufficient to deliver desired public policy outcomes but they are frequently a

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    Shannon Development May 2008 necessary component of an integrated policy response that will increase the

    probability of success.

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