Comment

A new report published by the Department of Enterprise, Trade and Employment could hold the key to unlocking crucial capital for scaling Irish companies, writes Sarah-Jane Larkin The Irish Venture Capital Association welcomes the report, The Use of Finance as a Catalyst to Develop a Scaling Ecosystem, published recently by Peter Burke, FCA, TD, Minister for Enterprise, Trade and Employment.  This comprehensive report highlights the critical role access to finance plays in the growth and development of businesses in Ireland. We commend the government for its focus on enhancing financial support mechanisms to empower Irish enterprises to scale and compete on a global stage.  We are also pleased to see the commitment to establish an implementation committee to immediately start work on recommendations to help high potential start-ups access scaling finance.  The recommendation to investigate options for pension fund participation in scaling equity funds, and encourage corporate venturing in Ireland, is particularly welcome.  This report has been published at a time when Ireland’s economy stands as one of the most dynamic and robust in Europe, comparing favourably to other small, advanced economies worldwide.  However, it has become evident for Irish companies seeking larger rounds of capital that the dramatic transformation in our economic fortunes in the last 30 years cannot outrun the impact of our longer-term economic history.  The measures suggested in The Use of Finance as a Catalyst to Develop a Scaling Ecosystem, if implemented, would contribute to rectifying the deficits caused by this history.  Ireland’s economic history has been marked by periods of colonisation, famine and political upheaval. All have contributed to some of the financial challenges we now face in terms of the capital available to our SMEs today.  During British rule, Ireland’s economy was heavily controlled, leaving little room for the accumulation of private wealth. The Great Famine further decimated the population and weakened economic structures, leading to widespread poverty and emigration.  Up until the 1970s and in the early stages of the boom in foreign direct investment (FDI), Ireland remained largely agrarian.  Our relatively recent prosperity, rooted in an open FDI-oriented economy, has resulted in a shortfall in the institutional and corporate investment typically seen in other European countries.  Unlike other nations, Ireland did not undergo a transformative industrial revolution in the late 18th and early 19th centuries, nor have we had the same opportunity to create domestic multinationals or intergenerational wealth.  As a result, there are very few domestic multinationals in Ireland that typically deploy assets in domestic venture capital funds or direct investment in start-ups. Over the last 30 years, successive Irish governments have implemented various policies to address these challenges, such as encouraging entrepreneurship, providing grants and subsidies for small businesses, investing in education and innovation and seeding a domestic venture capital and private equity industry.  These measures have met with mixed success due to deep-rooted structural issues, however, and the lack of sources of private capital. What The Use of Finance as a Catalyst to Develop a Scaling Ecosystem shows is that, while Ireland’s economic history has been shaped by a persistent lack of private funds, understanding these historical and structural challenges is crucial in developing strategies to overcome them.  The report’s recommendations to incentivise pension funds to invest in growing Irish businesses could significantly boost the available capital.  By enacting the report’s recommendations and addressing these issues head-on, Ireland could build a more robust and self-sustaining economic future.   Sarah-Jane Larkin is Director General of the Irish Venture Capital Association *Disclaimer: The views expressed in this column published in the August/September 2024 issue of Accountancy Ireland are the author’s own. The views of contributors to Accountancy Ireland may differ from official Institute policies and do not reflect the views of Chartered Accountants Ireland, its Council, its committees, or the editor.

The European Union’s new Artificial Intelligence Act brings opportunities for businesses but will not be without challenge, writes Keith Power Just seven percent of Irish businesses currently have governance structures in place for artificial intelligence (AI) or generative AI (GenAI). Despite this, the overwhelming majority (91%) believe that GenAI will increase cybersecurity risks in the year ahead. This is according to PwC’s latest GenAI Business Leaders survey, published in June 2024.  The European Union’s Artificial Intelligence Act (EU AI Act) is a sweeping new regulation aimed at ensuring that businesses have the appropriate AI governance and control mechanisms in place to deliver safe and secure outcomes.  Indeed, a large majority (84%) of our survey respondents welcomed the introduction of the EU AI Act, saying regulation is necessary to prevent the potential negative impact of AI in the future.  The new EU AI Act will also bring challenges, however. Its aim is to protect businesses, consumers and citizens in the EU from potential risks associated with AI in terms of health, safety, fundamental rights, democracy, rule of law and the environment.  By introducing standards and providing legal certainty, the Act also seeks to foster innovation, growth and competitiveness in the EU’s internal market.  It is the EU’s first comprehensive legal framework for AI and will level the playing field for businesses using the technology.  The Act adopts a risk-based approach, with its biggest compliance requirements applying to “high risk” AI systems.  These requirements include addressing data governance concerns, mitigating bias, ensuring transparency and implementing a system of quality management.  The Act also requires that users must be informed when they are interacting with chatbots, and that any AI-generated content must be clearly identifiable as such.   Several specific risks are particular to the EU AI Act, including failure to identify all uses of AI across a business as well as the potential for the inaccurate risk classification of AI uses.  The Act also obliges organisations to assess all of their use cases for AI. This may prove an onerous and time-consuming task given the dispersed nature of the use of AI in many companies. The risk of misclassification is high as risk classifications may change as an organisation’s use of AI evolves over time.  This necessitates the implementation of appropriate ongoing governance and control procedures to maintain compliance, bringing its own challenges. There is also a risk that the focus on compliance may lead to a drag on innovation.  The nuanced nature of some of the language used in the Act, coupled with risk classifications and role designations being subject to change, may prove problematic for some organisations.  The use of AI systems by third parties acting on behalf of organisations may also cause a degree of complexity.  There is much to be considered by Irish businesses to ensure they will be compliant with the new EU AI Act.  It will bring competitive opportunities, but complying with the new regulations will be a complex process. Keith Power is a Partner with PwC Ireland *Disclaimer: The views expressed in this column published in the August/September 2024 issue of Accountancy Ireland are the author’s own. The views of contributors to Accountancy Ireland may differ from official Institute policies and do not reflect the views of Chartered Accountants Ireland, its Council, its committees, or the editor.

European countries that have recognised Palestinian statehood have to decide what impact they will have on achieving a two-state solution, writes Judy Dempsey In May, the governments of Ireland, Norway and Spain recognised a Palestinian state. The war between Israel and Hamas was the catalyst.  Dublin, Oslo and Madrid had lobbied other European governments to be consistent in recognising the state of Palestine and in trying to push forward the idea of two states – Israel and Palestine, living side by side. Their efforts, so far, have come to nought. Now that they have unilaterally recognised Palestine, they face tough questions. First, what do they want this decision to achieve for it not to be just a symbolic gesture?  A state needs land, sovereignty, independence and internationally recognised borders. Palestine has none of these.  The illegal Israeli settlements entrenched in the occupied West Bank, which have continued during the Israel-Hamas war, make a viable Palestinian state impossible.  And, despite support from the Biden administration for a two-state solution, Israeli Prime Minister Benjamin Netanyahu has consistently rejected the idea.  Second, what role will Europeans play, if any, in making a Palestinian state viable?  For decades, the EU paid lip service to the two-state idea, but it was toothless in stopping the expansion of settlements and the flow of funds to the corrupt Palestinian Authority at the expense of genuinely independent civil society movements. The longer the settlement expansion continued, the more radicalised Palestinian society became. Hamas found fertile ground in Gaza, which it has controlled since 2007 following Israel’s withdrawal from the settlements in 2005.  Since then, Gaza’s population has been subject to the dictates of Hamas, which has tolerated no dissent, and to Israel, which has strictly controlled the movement of people, trade, goods and food in and out of Gaza. Now, EU divisions over the conflict are deeper than ever with little prospect of unity on the issue of ending the war or recognising Palestine.  Some other EU countries may follow Ireland, Norway and Spain – but don’t expect unanimity. Spain, Greece, Cyprus, Slovakia and Romania have yet to recognise the independence of Kosovo, which was declared as far back as 2008. If unity is impossible over Israel and Gaza, maybe it is time to find interim options.  What about forming coalitions of the willing instead of enduring endless disagreements and diluted foreign policy decisions? The EU’s differences over how Ukraine could restore its sovereignty and the ongoing disputes over the Israel-Palestinian conflict highlight the need for such coalitions to overcome deadlocks.  While not ideal, this approach may prompt EU policymakers to realise that constant disunity makes Europe weak and ineffective. *Disclaimer: The views expressed in this column published in the June/July 2024 issue of Accountancy Ireland are the author’s own. The views of contributors to Accountancy Ireland may differ from official Institute policies and do not reflect the views of Chartered Accountants Ireland, its Council, its committees, or the editor. Judy Dempsey is a Non-Resident Senior Fellow at Carnegie Europe and Editor-in-Chief of Strategic Europe

Ireland’s economic reliance on foreign multinationals is stark, posing significant risks for our future stability, writes Cormac Lucey. The Revenue Commissioners recently published the report, Corporation Tax: 2023 Payments and 2022 Returns. Despite its relatively innocuous title, however, the information contained in this report has critical implications for the Irish economy and Ireland’s public finances. It has long been known that the multinational corporation (MNC) sector pays a disproportionate share of corporation tax in Ireland and this new report from Revenue confirms it. When it comes to corporation tax, the foreign MNC sector paid 87 percent of all corporation tax in Ireland in 2022. What is startling is the extent of MNC contribution compared to our two other major tax sources: income tax and value added tax (VAT). According to a 2022 report by IDA Ireland, there are a total of 301,475 people working for foreign multinationals in the country. That year, there were 2,121,300 working across the entire economy, according to the Central Statistics Office (CSO). Hence, just 14.2 percent of the workforce was employed by the MNC sector at that time. Yet, thanks to the highly progressive nature of our income tax system and the much higher wages paid by our MNC sector, that cohort paid 54.6 percent of total income tax. The cherry on the cake is that, according to Revenue, the MNC sector also accounted for more than half of all VAT payments (53.8%). When you examine all of Ireland’s varying tax heads and apply these percentages to the expected actual 2023 tax take (as set out in the Budget 2024 documentation), it emerges that the MNC sector contributed 55 percent of Ireland’s total tax revenues that year – even if we assume that it did not contribute at all to customs, excise duty, capital gains tax, capital acquisitions tax, stamp duty or motor tax. If we make the more realistic assumption that the MNC contribution to those other tax heads was the same as its contribution to VAT, the MNC contribution to the state’s total tax take rises to a staggering 62 percent. There are two slow-motion dangers facing our MNC sector. The first is that our native incapacity drives away mobile international investment. We are already bursting at the seams in terms of the supply of housing (we can’t build enough), skilled personnel (we don’t have enough) and electricity (we’re at risk of not having enough). The second danger is that the US takes action to seize the eggs that our MNC golden goose has been laying for us by legislating for a global minimum rate of corporation tax on the worldwide earnings of all US multinationals at its current corporate tax rate of 21 percent. MNCs might save tax by paying 15 percent in Ireland only to face a six percent surcharge in the US. This measure would undermine any tax rationale for locating in Ireland and reduce our attractiveness as an investment destination. If we are at risk of having maxed out our extraction of eggs from the MNC golden goose, how stands our indigenous sector of Irish-owned operations? A recent report, published jointly by the Nevin Economic Research Institute (NERI) and trade union SIPTU, revisited the CSO analysis and concluded that the average value-added per hour of indigenous sector workers was just €28. This report shows sectoral productivity in the Republic compared to that in Northern Ireland. Apart from sectors dominated by MNC activity, productivity levels in the south lag those in the North, sometimes quite markedly. In the construction sector in the south, for example, productivity is less than half that north of the border. However unpalatable a conclusion, the economic rise of the Republic seems entirely down to foreign multinationals and appears to owe little to native endeavour. Disclaimer: The views expressed in this column published in the June/July 2024 issue of Accountancy Ireland are the author’s own. The views of contributors to Accountancy Ireland may differ from official Institute policies and do not reflect the views of Chartered Accountants Ireland, its Council, its committees, or the editor. Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland.

Stephen Lowry delves into details of the upcoming referendum on Ireland’s proposed participation in the Unified Patent Court  In the wake of referenda on family and care, voters were due to decide on another important constitutional referendum on 7 June. Although the vote has since been postponed by the Government, voters will be asked whether they approve of Ireland’s proposed participation in the Unified Patent Court (UPC).  First mooted in 2013 with the signing of the Unified Patent Court Agreement (UPCA), the UPC is a new international court with exclusive competence to grant ‘unitary patents’ – a new form of patent that gives uniform protection across all participating European countries on a one-stop-shop basis.  Currently within its jurisdiction are 17 EU Member States, though this number is expected to increase over the coming months as more countries move to ratify the UPCA.  Before Ireland can join the UPC, an amendment to the Constitution is needed as doing so will involve a transfer of jurisdiction in patent litigation from the Irish courts to an international court.  So, what’s to be gained from joining the UPC?  1. Reduced cost and administrative burden  At present, there is no single European patent valid in all Member States. Instead, individual patents must be held in each country where the patent is to be applied.  Applications can be made to either the national patent office in each country or as a single application to the European Patent Office (EPO).   Rather than acting as a one-stop-shop for patent litigation, however, the EPO can essentially only grant a bundle of national patents for the countries designated by the patent application.  If subject to challenge, these patents must then be litigated separately in the national courts of each country in which they are granted – thereby potentially giving rise to legal costs across a number of jurisdictions as well as risking the prospect of different legal outcomes.  By contrast, the UPC will instead allow applicants to apply for a single patent, which will be valid across multiple Member States, upon which it will be the sole arbiter.  2. Boost to FDI and export activity If the referendum is carried, the Government has signalled its intention to establish a local division of the UPC in Ireland. Doing so would mean Ireland would be the only common law, native English-speaking jurisdiction with a UPC.  Coupled with Ireland’s already attractive tax regime for research and development, the establishment of a local UPC would arguably further boost the State’s profile as a location of choice for inward investment.  Moreover, access to a streamlined European patent protection system would likely act as a useful incentive for Irish businesses to expand exports to a greater number of countries previously out of reach because of the costs of securing multi-jurisdictional patent protection.  3. Impact on the domestic economy  Estimates provided to the Joint Oireachtas Committee on Enterprise, Trade and Employment indicate that the establishment of a local division of the UPC in Ireland would contribute at least €415 million, or 0.13 percent in GDP growth, per annum by way of increased patent development activity.  Consequently, the establishment of the UPC can also be expected to generate increased expenditure and employment in legal, professional and other related technical advisory services.  Whether the referendum will be carried  will, however, ultimately depend on the Government’s ability to engage the public on the merits of adopting a streamlined patent court – a difficult task on such a niche subject.  Stephen Lowry is Public Policy Manager with Chartered Accountants Ireland

Growing support for extremist and smaller parties across Europe could change the fundamental composition of the new European Parliament, writes Judy Dempsey Elections to the European Parliament (EP) take place every five years. Until recently, the outcomes were predictable. The conservative European People’s Party has dominated with the Progressive Alliance of Socialists, albeit with declining numbers, and Democrats (S&D) coming in second.  Their decline reflects waning support for mainstream parties and an increasing fragmentation of European party systems at national and European levels.  This time round, the EP election is about how the growing support for extremist and smaller parties across Europe could change the composition of the parliament and the EU. Integration is taking a back seat. The European Council on Foreign Relations (ECFR) reckons the major winner in the EP elections will be the radical right Identity and Democracy (ID) group.  “We expect it to gain 40 seats and, with almost 100 MEPs, to emerge as the third largest group in the new parliament,” states ECFR.  The political elites across Europe are nervous as far-right parties in France, Germany, Austria, Portugal, Hungary, Italy and other countries are campaigning hard to strengthen their presence in the EP. And, despite backroom deals and trade-offs taking place inside the EP regarding which countries will become EU commissioners, a different political constellation could upset the way things have been done in the past. The political status quo across Europe is changing. The 2009 global financial crisis dented the belief that the EU was on a permanent trajectory towards prosperity. The wars in Syria that led to well over a million people seeking refuge in Europe in 2015 created divisions inside the EU regarding identity and values. COVID-19 and Russia’s war in Ukraine dented the unity and self-confidence of the EU even further.  More importantly, as EU leaders grapple with these global issues, they must respond to their electorates back home.  Citizens want security, affordable housing, better access to good schools, healthcare and other public services. These services are under pressure as governments, struggling with inflation, weigh up the cost of spending or saving more.  The far-right, nationalist and far-left parties, from the comfort of not being in office, exploit these crises. They want their governments to stop sending weapons to Ukraine; to stop the inflows of asylum seeks or refugees fleeing wars, famine and the effects of climate change. They question the costs of protecting the environment.  In short, the sense of security that characterised most of (Western) Europe after 1945, and even after the reunification of Germany after 1991, is being replaced with an uncertainty that populist and far-right and far-left parties are tapping into.  They challenge the status quo that oversaw the establishment of today’s EU.    If they gain many seats in the EP, they will not want to leave the EU. The financial benefits are too big and support for the EU is still high across the bloc. Instead, they want to change the EU from within.  The issue for these parties is sovereignty. Like Brexit, they want to ‘regain’ their national sovereignty but remain in the EU.  Yet EU membership requires ceding some sovereignty in return for certain benefits. With few exceptions, EU leaders shy from selling those benefits to their citizens. Their reluctance plays into the hands of the far right and the far left.   Judy Dempsey is a Non-Resident Senior Fellow at Carnegie Europe and Editor-in-Chief of Strategic Europe