The Minister for Finance has firmly committed the Government to a continued low-tax environment, writes David Kennedy

When one reads into the detail of the Minister for Finance, Mr Cowen's first Budget, it offers very strong sentiment that the low-tax/pro-business environment cultivated by his predecessor remains very much the order of the day.

Although much has been said of the Inchydoney agenda, by rejecting out of hand CORI's proposal to increase the standard corporation tax rate from 12.5 per cent to 17.5 per cent, the Minister has firmly committed the Government to a continued low-tax environment and has clearly signalled its intention to deliver on its social agenda without compromising on low taxes.

The Minister's tone in stating "it is the revenues generated by economic activity which keep public services going, and not higher tax rates, as some would have us believe" also suggests he is comfortable to tackle this issue head on.

The Minister's confirmation that "he has no problem in maintaining justifiable relief's and, indeed, extending them, where appropriate", is also particularly comforting in the context of his proposed review of tax incentives. The incentives earmarked for review include property development incentives and incentives to promote particular industry sectors.

Much has been written about perceived abuses of these tax incentives. However, it seems reasonable to be optimistic that the review will point to the social and economic benefits of the incentives far outweighing their tax cost, which is estimated at €200 million per year.

Tax reliefs for student accommodation have been hugely successful in encouraging the development of facilities which, in all likelihood, would not otherwise have been developed.

Similarly the system of accelerated allowances for hotels has resulted in a considerable improvement in our tourism infrastructure over the past decade.

For this reason, it would not be surprising if these incentives were scaled back and phased out, possibly over a period extending beyond the current intended termination date in July 2006.

On the other hand, much can still be achieved from continuing tax incentives for nursing homes, private hospitals, sports injury clinics and childcare facilities. Continuing these incentives would be consistent with the Governments social charter and help to alleviate the queues in hospital A&E departments.

Property tax incentives have been unreasonably criticised as being predominantly available to high-net-worth individuals. To the extent that this is so, it is because of limitations placed on their application by successive governments, which have largely ring-fenced tax allowances against rental income only and limited the number of individuals who can invest in any single investment to 13.

It is conceivable that the review will point the way for these restrictions to be reversed in the interest of meeting Mr Cowen's objective of improving the equity of the tax system and extending opportunity to participate in tax-based investments beyond those on the highest incomes.

Other impediments to extending tax incentives to a broader base, such as reducing the tax life of all qualifying properties to seven years, spreading tax allowances evenly over that period, and the abolition of stamp duty on unitised developments, are also likely to be addressed in the review.

The review is also being extended to certain categories of tax-exempt income, including income from woodlands, stallions and greyhounds.

It is critical that this part of the review is undertaken in the context of protecting our economic strengths, protecting and increasing jobs, and remaining attractive for foreign direct investment and highly mobile investment.

The State's bloodstock industry is a case in point. Tax exemption for stallion fees has been pivotal to developing the Republic into one of the leading bloodstock countries in the world. It has created direct and downstream jobs and contributed strongly to the economic prosperity which underpins the Minister's ability to take on social reform.

Politically, Mr Cowen may be tempted to abolish tax exemption for stallion fees. A possible alternative might be to extend a low incentive tax rate to bloodstock profits.

However, given the highly globalised and mobile nature of the bloodstock industry, and its importance both economically and symbolically to the Republic, it will be important for the Minister to ensure that any change in the status quo will not undermine the future prosperity of the Irish bloodstock industry.

The budgetary papers noted the Minister's intention to seek submissions on measures that could be introduced to limit the extent to which the use of tax incentives by high earners reduces their tax bill.

Already several suggestions have been put forward in this regard, including standard rating of tax incentive allowances, providing for an alternative minimum tax and capping the level of ring-fenced allowances at a fixed amount. All of these potentially undermine the likelihood of tax incentives achieving their intended economic and social objectives.

A politically acceptable approach, which might not see the baby thrown out with the bath water, could entail a carry forward of tax relief from one year to the next, to the extent that it would result in no more than, say, 80 per cent of the taxpayers liability to tax in any year, being sheltered by the use of targeted incentives.

The debate on this issue is likely to heat up in the coming months.

David Kennedy is a Tax Partner with KPMG