Introduction of Exports Sales Relief - A 50 Year Review!
Author:
Peter Clarke
“There is nothing in this Bill about which to get excited”
a comment on the introduction of Exports Sales Relief in 1956
The above statement was made by a Deputy of Dáil Éireann, during the debate on the Finance (Miscellaneous Provisions) Act, 19561. It is now considered by many that the introduction of Exports Sales Relief by this legislation was one of the most important factors in the massive economic transformation of this nation during the past 50 years. Yet, it is remarkable to reflect that this legislation was introduced as a temporary measure and was primarily intended to solve Ireland’s severe balance of payments crisis at that time. The legislation did not have profound long-term aspirations and its provisions were much criticised as being inappropriate, inadequate, discriminatory and unworkable. This brief historical article reviews the introduction of Exports Sales Relief in Ireland 50 years ago which had, and still has through low rates of corporation tax, a significant impact on Ireland’s economic development.
In 1956, long before many current readers of Accountancy Ireland were born, Ireland was a dramatically different place than it is today. While western Europe was experiencing a significant degree of post-War prosperity, fuelled by the Marshall Aid Plan, the economy of Ireland was stagnating with living standards increasing at much lower rates than those in continental Europe. Ireland was, predominantly, an agricultural country with about half of those employed working in that sector (the current figure is close to 6%) and exports mostly consisted of live cattle for the British market. It was estimated that our per capita income, for example, was about half that of the United Kingdom. Reflecting this bleak economic landscape and lack of job opportunities, emigration was running at about 40,000 a year - mainly young people, and there were only about 150,000 persons liable to income tax. Small, family-owned firms were the dominant form of industrial organisation and it was estimated that there were only about 3,000 separate manufacturing establishments i.e. separate factories but which could be under the same ownership. Over half of these had less than 20 persons employed. It was estimated that the Irish business elite of the 1950s was comprised of about 100 families. (At that time, The Institute of Chartered Accountants in Ireland had less than 1,000 members in total, many working in Northern Ireland or abroad). There was a much talked about international balance of payments crisis and a mood of despondency prevailed throughout the country. Some influential commentators had questioned whether, after some 30 years of self-government, Ireland would be better off as part of the United Kingdom?
The Ireland of today is often described in economic terms as the Celtic Tiger. Official statistics, such as Gross Domestic Product (GDP) per capita, now indicate that we are one of the richest countries in the world. How did this happen? Clearly such a transformation is attributable to a complex interaction of factors over a period of time. Nevertheless, there is agreement that foreign direct investment has been an integral part of the success of the Irish economy over the past five decades. It is often argued that taxation considerations are the most important incentive for companies deciding whether or not to locate their operations in this country. Our current benign corporation tax rate can be traced back to the Finance (Miscellaneous Provisions) Act, 1956.
In November 1956, the Finance (Miscellaneous Provisions) Bill, 1956 was introduced in Dáil Éireann by the then Minister for Finance - the late Gerard Sweetman - within the context of dealing with the “desperate situation” in the country. The Bill was short but contained an unusual variety of provisions including those designed to encourage coal production; the granting of industrial building allowances so as to stimulate building activity, and provisions enabling the introduction of the prize bonds scheme. In addition, Part III of the Bill introduced unique provisions for what was commonly referred to as Exports Sales Relief (ESR). It is interesting to note that the legislation in relation to ESR contained only five sections, described at the time as “unorthodox” and “revolutionary”. Given the fact that the overall Act contained 24 sections, this does not suggest legislative importance or priority. Dáil debates at the time highlight that the stated purpose of Part III was, along with other measures taken earlier that year, to ease the perceived balance of international payments problem, which was developing into grave proportions. The ESR provisions only covered a 5-year period and this reflected its temporary intention.
The initial ESR legislation was framed in terms of a 50% remission of tax liabilities relating to corporate profits, based on the increase in a company’s exports of manufactured goods compared with a standard period. However, this concession was considerable given the effective tax rate on corporate profit around that time was in excess of 40%. The idea of such a tax remission had been suggested earlier that year by the Irish Exporters Association in their submission to the Committee of Inquiry into the Taxation of Industry. Amazingly, the Revenue Commissioners argued against this request on the grounds that it “would not merely violate the basic principles of income taxation but would set up a dangerous precedent”. Members of the Committee accepted the Revenue’s viewpoint and, in their final report concluded that “we are doubtful, however, if income taxation provides the most suitable channel for concessions of this nature, and we agree that aides to the development of industrial exports should be the function of some Department other than the Revenue Department.” Thus, in face of such opposition, credit must be given to the Minister for framing the legislation.
It is important to note that initial ESR tax remission was drafted in terms of the increase in sales during a period with reference to the standard period. Clearly this provision would be more attractive to new companies rather than existing entities and the late Sean Lemass commented in the Dáil that “the Minister has persisted in preserving the pernicious principle of discriminating in taxation between firms engaged in the same business”. He also argued that the tax concessions would not encourage new firms to locate industries in Ireland, given “the tax laws already operating in the countries from which these firms may come”. Another discriminatory aspect of the legislation noted, was that it only applied to corporate bodies rather than sole-traders or partnerships. Thus, it can be argued that this legislation encouraged the incorporation of non-incorporated firms which, in turn, generated additional demand for (compulsory) audit services and stimulated the demand for Chartered Accountants. The Act, it was pointed out in the Dáil, also discriminated against goods “assembled within the State, perhaps components imported and assembled for re-export”. Furthermore, in colourful Dáil exchanges, the definition of “goods manufactured within the State” was highlighted as being problematic. In brief, the legislation was not universally supported.
For foreign direct investment (FDI) to flow into Ireland another piece of legislation would have to be repealed. At that time, a major constraint to FDI was the Control of Manufactures Acts (1932/34), which tried to ensure that, as far as possible, Irish nationals should control manufacturing enterprises that were being established during the 1930s behind protective tariffs. Broadly speaking, the Acts required that, before a new manufacturing company could legally commence operations (in the Republic) one half of the issued capital and at least two-thirds of the capital with voting rights, should be in the beneficial ownership of persons born in Ireland, or qualified by residence. This legislation, originating in a time of economic nationalism, had an important psychological impact of reflecting hostility to foreigners. The Control of Manufactures Acts were eventually repealed and full ESR remission i.e. a zero tax rate, was also introduced. Ireland’s economic transformation could now begin in earnest as the underlying (tax) legislation was simple to understand and apply. It clearly indicated that Ireland was pro-enterprise and the (revised) legislation’s 20-year exemption signalled a long-term commitment to investment. Finally, the tax legislation was unique and unparalleled.
However, the first firms that set up plants in the Republic of Ireland were largely from European countries and were attracted by cheap labour. US firms followed, attempting to gain access to the EU market by locating the final stage of their manufacturing processes within the Republic. For both groups the ESR tax concession (and government grants) were important.
The introduction of ESR was certainly associated with increased industrial exports and an expansion of industrial domestic product as the table below indicates. For example, by 1963 exports (excluding live animals which would not have attracted any tax remission as this was not a manufacturing activity) had increased from £62 million in 1956 to £142 million - a 129% increase in monetary terms. Further industrial expansion, with some disruption during the 1980s, would follow in later decades.
The final episode in this brief story about ESR relates to Ireland’s negotiations with the European Union (then called the EEC). It was noted by the European Commission that ESR offended the non-discrimination clause of the Rome Treaty. A rather clever compromise was found since the EEC had no agreement in place on tax harmonisation. Thus, Ireland was entitled to substitute a low rate of corporation tax provided it applied to all companies, manufacturing and others. In 1978 ESR, which was available to manufacturing companies only, was replaced by a flat rate of corporation tax applicable to all corporate entities, which currently stands at 12.5%.
In conclusion, the ESR tax concession has had a profound economic impact on Ireland since its tentative introduction in 1956. One must acknowledge its significance although its full potential was probably not recognised at the time. The Deputy who remarked that “there is nothing in this Bill about which to get excited” was, with the luxury of considerable hindsight, rather wide of the mark.
Note
1 The short title of the Act is used here.
Peter Clarke is Professor at the UCD Accountancy. He is a regular contributor to Accountancy Ireland. His working paper entitled “The Historical Evolution of Accounting Practice in Ireland” can be obtained free of charge by sending an email to: Peter.Clarke@ucd.ie