Tax and what Australia can learn from Ireland

About five years ago I had an opportunity to ask the question to a then ex-treasurer of Australia.  His only response was that it would not make sense to turn Australia into a tax-free zone and become like the next Bermuda.

"Basically if you incentivise businesses to export then that's what they do.” - John Ryan

Of course, Australia since has implemented increasing taxes of foreign firms with the introduction of the ‘Google’ or ‘Netflix tax’ as it is known and in recent years there has been more focus on raising taxes than incentives to invest downunder.

So I’ve looked at what can we learn from the Emerald Isle – a country we are close to culturally despite its location on the other side of the world.

It was relatively scantly reported our finance minister Mathias Corman was in Ireland recently.

Ireland enjoys a positive balance of trade with Australia exporting about 20 times as much as it imports.

Corman talked about how Australia could and should do more with Ireland. But until Australia puts the right incentives in place as outlined in Johnson it will remain as talk and our balance of trade will dwindle in comparison to our larger Asian neighbours.

No question

One strong argument is we should better align ourselves with start-up culture and the people exporting our collective intellectual property. We have fittingly been called a ‘sandbox economy’ - a place where an idea can be tried out to see if they work.

We need to look at our terms of trade and our balance of trade to start to get a feel for how Australia is doing.

Both Australia and New Zealand operate generally flat when it comes to trade – as in we import as much as we export.  In simple terms flat means no net income and, aside from some recent pops, we seem to be treading water.

In comparison let’s take a look at a country at the other end of the world also on the periphery of a major continent - Ireland. 

We see a story that on the surface looks enviable.  Ireland enjoys a balance of trade surplus of almost 2:1. But Ireland, as I learned growing up, was never a primary producing country such as Australia with its commodities. 

Ireland is a true service model economy.  Two of its most famous services are software production and financial services administration.

The vision of Charles J. Haughey and Dermot Desmond back in the 1980s in creating the International Financial Service Centre (IFSC) transformed Ireland and made it the story it has become today.  

Ireland in the 1990s had a GDP number of around $US10 billion. Today that number is closer to $US300 billion, growth of some 3,000 per cent.  If we look at Australia in the same period it has grown about 700 per cent. 

Ingredients

There were two key ingredients to Ireland’s success. One was the investment in education, the second was lowering the tax rates for exporting companies. 

In Ireland the ‘rising tide carries all boats’ saying applies to education. Education was free or de minimis for all locals - foreigners did pay a very higher relative price. 

Even today the Catholic secondary school I attended in Ireland charges less than one tenth the fees I pay for my kids to attend in Australia. Education in Australia is become a luxury commodity and too much weight is still placed on which school you went to.

Export tax relief is a very simple concept. Basically if you incentivise businesses to export then that's what they do. 

What makes the Ireland story more extraordinary is it is part of the European Union single market and must operate within tight rules that bind all member nations.  In reality Ireland aims to be the English speaking gateway to Europe - and somewhat more so post Brexit.

So, what is really stopping Australia from taking regional leadership as the main English speaking gateway to Asia? 

Aside from APEC there are no formal restrictive barriers to Australia taking a leaf out of Ireland’s storybook.

On education Australia recently seems to be taking steps but only time will tell if the right changes are being made.

Australia could implement real export-led incentives, to really change our growth story in Australia, particularly as our mining lead boom softens. 

John Ryan has lived in Australia for the past 17 years working in senior roles within a large Capital Market Fintech organisation.  Today he runs AIC, a consulting services firm that helps established to startup firms gain traction in the Australian and Asian markets.