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Third-Time Lucky Ahern Pledges To Maintain Low Tax Ireland

by Jason Gorringe,, London

29 May 2007

Prime Minister Bertie Ahern's long-governing centrist Fianna Fail Party, which looks set to form a new coalition government following elections last week, has pledged to maintain the economic policies which have helped Ireland achieve some of the highest rates of economic growth in Europe in recent years.

Fianna Fail won 78 seats in the 166 member parliament, but failed to obtain the minimum 83 seats needed to form a government. However, FF is soon expected to reach a deal with one of the minority parties, allowing Prime Minister Bertie Ahern to govern for a third successive term. Possible coalition partners include the Green Party, which won 6 seats, or the Labour Party, but Ahern is thought likely to favour a deal with the Progressive Democrats, coalition partners in the previous government, who were reduced to 2 seats from 8 in the election, and several of the five remaining independents.

Ahern, currently the European Union's longest-serving leader, was widely tipped to be ousted from power after dismal opinion poll showings in the lead-up to the vote, but a dramatic last-minute turn-around in the opinion polls from 35% support to 42% in the final week of campaigning sees Ahern clinging to power for what will be his final term - he has already announced his intention to step down when he reaches his 60th birthday, an event which will coincide with the next general election.

Fianna Fail's economic reforms have led the transformation of Ireland’s economy from a high-unemployment, high-tax and low public investment country to a modern, low-tax and high investment economy. Until 1998 the standard rate of corporation tax in Ireland was 32%, but following the Irish Government's agreement with the EU for a general rate of 12.5% to apply from 1st January 2003, the rate applied to trading income fell in stages between 1999 and 2003.

Although the 12.5% rate has come under fire from several quarters, most notably from those within the European Commission intent on creating some form of harmonised European corporate tax base, it is viewed by the Irish government as a cornerstone of the Republic's economic success, and is unlikely to be surrendered without a long and bitter fight.

"We recognise the vital role played by low taxes in our economic success," Fianna Fail said in its manifesto. "We guarantee that the 12.5% rate of corporation tax will not be changed."

The party has also stated that it will "resolutely oppose" any attempt to introduce tax harmonisation within the European Union, either directly or through technical measures.

"Under Fianna Fail, Ireland’s dynamic and flexible economy will continue to be one of the most attractive locations in the world to invest, to employ and to do business in," the manifesto pledged.

Although economic growth has moderated somewhat in recent years, investment friendly policies saw growth exceed 10% during the 1990s, hitting a peak of 12% in 1999, and earning the country the moniker of the 'Celtic Tiger'. Since 1994, GDP growth has averaged 6.7%, easily outpacing Ireland's main EU partners like the UK, Germany and France. Figures for last year also indicate that the economy is heading back on the path to strong growth. Data released by Ireland's Central Statistics Office in April showed that the Irish economy grew by 6% last year - the strongest rate of growth since 2000.

In its next five year term, Fianna Fail has said that it will continue to lighten the tax and regulatory burden on individuals and businesses. The party has committed itself to reducing the standard rate of income tax to 18% and the higher rate of income tax to 40% over the lifetime of the next government, if economic resources allow. It will also use tax credits and bands to keep low income earners out of the standard rate band and average earners out of the higher band.

Upon returning to government, the party has said that it will conduct a review of business regulation; last month, the Business Regulation Forum’s Report estimated that government regulations could be costing business up to EUR500 million each year that could be avoided. It will also continue to enhance the Business Expansion Scheme and Seed Capital Scheme, which were extended in the 2007 budget for a further seven years until December 31, 2013 with the company limit increased from EUR1 million to EUR2 million. The investor limit is also being increased from EUR31,750 to EUR150,000 in the case of the BES and to EUR100,000 in the case of the SCS. However, the changes to the schemes, along with some additional alterations in relation to the operation of the schemes, are subject to the approval of the European Commission.

Other business friendly measures announced in the budget included revised preliminary tax payment arrangements for Corporation Tax, increased VAT registration thresholds, the enhancement of the Tax Credit scheme for R&D expenditure and the introduction of VAT relief for conference-related accommodation expenses from 1 July 2007, to allow Irish hotels to compete more favourably on the global stage for conference business.

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