An Open Letter to Simon Harris

Dear Simon Harris,

I’m not sure we need a Swedish model to get Irish people investing.

The financial press and money blogs are full of speculation about the Special Investment Account (SIA) or is it the Personal Investment Account (PIA). Whether it’s a SIA or a PIA, everyone expects you and Robert Troy to announce it in the Autumn budget, but nobody knows for sure what it will look like. Will it follow the Swedish model of a c. 1% annual tax rate or the UK ISA model of £20,000 per annum growing tax free? Will it be too complicated? How many billions will move from the Irish banks? Will it be invested in the Irish economy? Is the civil service trying to put you off the idea? Can the Exchequer afford the giveaway? Will it get people investing? Will it be popular with voters?

There would be no point in my adding to this idle speculation and I’m not going to. You may be surprised to read that I’m not sure you need to introduce it at all.

I should say first that as an owner of one of Ireland’s largest wealth management firms, I certainly won’t complain if you do introduce the SIA. It’s just a question of priorities and the SIA doesn’t seem to be the best solution to the problems we need to fix. Depending on which commentator or lobby group you read, the problem we are solving is different:

1. Encouraging Irish people to invest in assets that produce a better long-term return
2. Supporting the Irish start-up ecosystem
3. Simplifying the existing taxation regime for investment funds

Encouraging Irish people to invest in assets that produce a better long-term return

The first question seems to come mainly from the EU drive for a Savings Union that aims to get Europe to develop a more dynamic investment culture like the USA. If that is your main goal, I’m all in on that. Everyone knows that the swashbuckling Americans are far more likely to invest in the stock market than we conservative Europeans who prefer bank deposits. There is also no questioning the stats that shares have outperformed deposits over my lifetime. So, this objective seems like a no-brainer. But is an investment account with tax-free or reduced tax on growth the way to emulate the USA investment culture? Maybe, but there is one major flaw in that argument.

The USA has no SIA, PIA, ISA or any special tax incentive for investors in the stock market apart from pension products like the 401K and the IRA which we already have in Ireland with the PRSA and various other pension products. The Americans don’t need a special tax incentive to invest in shares, so whatever is stopping us, it can’t just be the tax regime. I don’t have a body of research to prove this but I am very confident in proposing that the primary reason Americans invest in shares is decades-old culture throughout US government and society that risk-taking and business success are public goods that will be celebrated. That mindset is deeply embedded in America and investors back it with their savings to get a piece of the action.

There are certainly aspects to this culture that are unsavoury to Europeans such as the lack of a social safety net. There is nothing to stop us having our own distinctive investment culture as well as a social safety net. That may seem like too much hard work and too far beyond the next election cycle, but a major cultural change like this takes more than tax giveaways. I can still remember when our Minister of Finance Charlie McCreevy described the stock market as being “casino-style” capitalism while seeing no problem with dishing out oodles of tax relief for property investors. He also introduced the SSIA tax relief but that was for bank deposits as well as stock market funds and as soon as we ran out of money, the SSIA was withdrawn. I urge you to avoid the trap of introducing another unsustainable tax incentive that a future government will withdraw when times get tough. We need a more durable solution to change our investing mindset. Consistent nudges and a clear path will be more effective than one big SIA shove.

Supporting the Irish start-up ecosystem

As for the second question, to read some lobby groups, the purpose of your SIA proposal is to encourage more financial support for entrepreneurs and to democratise venture capital. Some commentators also like to say that Ireland doesn’t produce any indigenous industrial champions and is far too reliant on multinationals, so we need more tax incentives to drive ordinary investors into start-ups. Firstly, I don’t buy the commentary that we don’t have any entrepreneurs or world-class businesses. What about giants of industry; CRH, Kerry Group and Ryanair? In tech, there’s Fin (previously known as Intercom) which just sold for $3.6bn to Salesforce. Look also at Workvivo, Tines and Phorest.

Additionally, when you concentrate global giants, you create a ‘knowledge spillover’. Engineers and executives cycle out of multinationals and hit the ground running in start-ups or scale-ups. Third level institutions adapt to the local jobs’ market providing role-ready graduates to feed the ecosystem. Dare I say it, but the solution to our need for ifindigenous industry is a long-term, concerted whole-of-government and civil service campaign to support even more university and private sector research, a focus on the required capabilities, expansion of entrepreneurial relief and a targeted reduction in CGT for investment in private companies. I believe you are thinking like this, but we need you to do more.

Venture capital is a very high-risk asset class. That doesn’t mean it’s a bad idea; it is just best left to experienced investors with a very high appetite for risk and the specialist expertise required to assess the opportunities. Beware the siren voices – one sure-fire way to run your strategy into the rocks is by luring cautious investors straight off deposit into venture capital funds. In any case, we already have a tax incentive for this called the Employment and Investment Incentive Scheme (EIIS). It could do with reform and expansion, but it will never be suitable for the widows and orphans. The SIA is not the answer to the start-up question.

Simplifying the existing taxation regime for investment funds

The final question is the most mundane but also the most germane. I would strongly encourage you to streamline and reform our existing investment taxation regime which is riddled with inconsistencies. Most of those commentators and bloggers, who are telling you how to design the SIA, don’t mention your very worthwhile “Funds Sector 2030” consultation and review on investment fund taxation. The final report made several very sensible suggestions. For example, if your primary goal is to encourage more Irish investors off deposit and into shares, how can it make sense to tax deposit interest @ 33% DIRT and investment fund returns @ 38% Exit Tax? If anything, it should be the other way around.

If another goal is to encourage prudent diversification through investment funds, why are individual shareholdings allowed to grow tax-free until death while fund investors are taxed every eight years @ 38% through the deemed disposal tax? If another goal is to protect the Exchequer by ensuring a fair tax rate is actually collected, why charge a 1% levy on funds provided by domestic life companies who collect Exit Tax at source and pay it to Revenue, while charging no levy on UCITs, ETFs and offshore funds who don’t have to collect the Exit Tax at source or pay it to Revenue? If you ever do a review of online platform investors, I suspect you will find swathes of investors who have no idea they must pay Exit Tax or declare 8-year Deemed Disposal. Finally, why are we encouraging the tax arbitrage that incentivises investors with specialist tax advice to source offshore ETFs and other funds that are only subject to CGT @ 33% rather than domestic funds with Exit Tax @ 38% when the underlying investment strategy is the same?

In conclusion, underpin the foundations before continuing to build

I know this challenge is complex and requires meticulous attention but if I am reading you right Minister, you are a details man. I humbly put it to you that before you launch the SIA with zero tax on growth, you should iron out the existing investment fund regime which you inherited. If you can do both then happy days, but I am sure you have a long list of demands for tax relief and only so much supply.

I think you will find that Irish investors will richly reward you for clearing the path of all those tax obstacles by removing the 1% levy, reducing the exit tax rate to 33%, removing the 8-year deemed disposal and allowing them to offset fund losses against fund gains. Then see if our Irish animal spirits are set free and we’ll all be investing like our American cousins without the need for any expensive Swedish model SIA.

Yours sincerely,

Tom Clinch

Managing Director, Clinch Wealth Management