“I believe the spat has brought this down on his (Magnier’s) own head, to be honest,” said one government TD, speaking on the basis of uncharacteristic anonymity. “The one thing that dispute brought home to every man on every barstool up and down the country was the fact that the Rock was making a tax-free fortune.”
The scheme allows a tax write-off on income earned from pedigree stallions for covering broodmares — the nomination fee — and producing foals. It is impossible to give an accurate estimate of how much tax is forgone by the state as a result of this because until last year there was no requirement for breeders to declare their income from the activity.
A couple of months after the dispute was settled last March, the European commission issued an injunction demanding information from the Irish government on the bloodstock tax break that it had requested almost a year previously. Once again, the government chose to drag its feet but now it seems to have run out of road. A few weeks ago the commission wrote to the government, expressing its view that the stallion tax exemption appears to constitute state aid in contravention of European law.
This Wednesday a committee comprising staff from the departments of finance and agriculture will hold the first in a series of meetings with officials from the commission in Brussels to discuss the continuation of the tax-free status for the Irish stallion industry.
The very public dispute between Magnier, the bloodstock baron, and Ferguson, the football legend, over the tax-free millions expected from the stud fees of a single horse may prove to be the rock on which the 35-year-old tax break will finally perish.
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LOGIC suggests that a €330m business built on the twin pillars of sex and pedigree bloodlines is unlikely to require government handouts to keep it afloat. Yet, the commission’s inquiry already has horse owners sounding the death knell for breeding in this country (see panel) and defending the fairness of the tax break.
“We certainly wouldn’t agree with the assertion that this confers an unfair advantage for the Irish bloodstock industry — we don’t regard the tax exemption as state aid,” said Niamh O’Sullivan, the manager of the Irish Thoroughbred Breeders Association (ITBA). “This has to be put in its historical context: it was brought in to reward risk-taking and is as relevant now as it was then to an industry that has created over 20,000 jobs.”
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O’Sullivan believes the debate on this issue has been characterised by half-truths, promulgated by a media that doesn’t understand the nature of the exemption.
“There is a general misconception that we don’t pay tax at all and that is just not true,” she said. “The only exemption is on stallion fees because of the high-risk nature of this aspect of the business. We generate a lot of tax in every other part of the industry.”
The EU is likely to view these arguments as irrelevant to the central issue of whether or not the policy constitutes unfair state aid. This much is conceded by the ITBA, which argues there are other reasons for continuing the exemption.
“Other countries, such as France, Britain and even Turkey, give incentives to their bloodstock industries — it is not just Ireland,” said O’Sullivan. “The fact that the stallions are coming to Ireland makes them available to all breeders throughout Europe: if it wasn’t for this they may not be in Europe at all.”
A recent ITBA-commissioned report from Indecon, a firm of economic consultants, states that the amount of tax forgone by the state from the exemption amounts to only €3m. Against this, it says, “the stallion and broodmare sector contributes €37.5m in combined tax” based on PAYE and profit from the sale of horses. However, it wasn’t until January 2004 that breeders were compelled to make records of income earned from nomination fees available for scrutiny.
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The Revenue Commissioners said: “It is not for us to comment on why this was never part of the original legislation but this doesn’t mean the EU will have to work in a vacuum — its argument is based on principle rather than money.”
Breeders will not have to post tax returns until October 31 and the final tally is unlikely to become public for several months after that. Depending on what Brussels decides in the interim, the lost revenues might be irrelevant.
“If Ireland refuses to move on this the commission must decide to take a formal investigation and then decide whether to demolish illegal state aid if it exists,” said Kate Healy, a commission press officer.
There have been rumblings that when the equine-loving Charlie McCreevy, the former finance minister, departed for Europe, the bloodstock industry lost its best friend. The exemption may also fall victim to the current public demand for a fatwa on tax loopholes for the mega-rich such as Magnier.
“Two things are happening independently: there is a local political requirement for equity (in tax matters) and outside the state the potential subsidy aspect is an issue,” said Sean Fleming, the Fianna Fail chairman of the Dail committee on finance and the public service. “A huge part of the problem is that the information has never been captured and so it has been impossible to conduct a cost-benefit analysis of the break. Anyway, it may not be our call at the end of the day. Every tax incentive has to go through Europe now.”
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Writing last week in Thoroughbred Daily News, the industry newsletter, bloodstock consultant Bill Oppenheim praised the tax break, claiming it “transformed Ireland from having virtually no stallion base to being Europe’s runaway leader in that department”.
The tax break was introduced by Charlie Haughey when he was finance minister in 1969. Ireland’s bloodstock business is now third in value behind only America and Australia. Irish breeders accounted for half of all top prize-winning racehorses in 2004 but as the very public argument between Magnier and Ferguson made clear, winnings on the track are dwarfed by the tax-free riches to be reaped from siring foals.
The vast majority of nomination fees are less than €10,000, but Rock of Gibraltar costs €55,000 a time, while a dalliance with Sadlers Wells would cost a broodmare owner up to 10 times that amount.
In 2003, there were 390 thoroughbred stallions servicing 16,938 broodmares. With 10,574 foals the result of these one-field stands, the country accounts for 42% of EU output.
The industry is talking doom and gloom if the break is abolished, arguing that it will end the environment that attracted wealthy, employment-creating, taxpaying foreigners such as the Aga Khan and the Maktoum family. Others believe it will be business as usual.
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“The tax break has certainly helped, but I would say Ireland is a great country for breeding because of the level of horsemanship, the climate and the quality of broodmares,” said Sam Bullard, the head of nominations at Dalham Hall Stud in Newmarket. “We have stables in Ireland and in the southern hemisphere as well so we have to work with various tax situations and there are plenty of other reasons other than tax as to why we choose to operate where we do.”
THE tax break may end up being a call to arms for an industry that has failed to fight its corner in the court of public opinion, according to Oppenheim.
“The problem is that Europe’s definitions of competition are not truly relevant to an industry as international as thoroughbred horse breeding,” he said. “Because we have allowed ourselves to be subsumed by the racing sector these taxation and other political and economic issues which need to be addressed by our sector don’t get brought into public consciousness. The exception is where issues like ‘favours to rich racehorse owners’ become political footballs.”
WEALTH ACCUMULATOR
JOE FOLEY, who runs Ballyhane Stud in Carlow, firmly believes that if the tax exemption goes it would constitute a huge setback for his business and spell the end of the industry in its present state.
“Most people in this industry are like me, they’re in the bread-and-butter end of the market,” he said. “The tax exemption is the lotto jackpot scenario.”
Foley believes the perception of the worth of the tax break on earnings from siring foals is much higher than its actual value in monetary terms.
“It provides an incentive for people to invest in a stallion that might just reap a tax-free windfall in the future. That doesn’t happen very often but like the lotto, the fact that the chances are slim doesn’t stop someone from buying a ticket.”
Foley, who is currently standing five stallions with cover prices between €4,000 and €7,000, says the industry has been misunderstood and the tax breaks are not perks for the wealthy.
“I am a farmer’s son: I am certainly not well-heeled,” he said.
The prospect of the end of the exemption is already scaring investors. If it goes, the fear is that the trickle would become a flood and when the current crop of stallions are past their prime, small breeders will not have the financial clout to replace them with stock of similar quality.
This concern is shared by Anthony Rogers, who runs the Airlie Stud near Maynooth, Co Kildare. “The real squeeze is going to be on the smaller breeders,” he said.
Rogers says the exemption has knock-on benefits for the breeding industry as a whole because the proliferation of quality stallions in Ireland is
a magnet for owners of broodmares. He also queries the European commission’s logic on the alleged unfair advantage of the tax break.
“How can Europe restrict the tax situation in a single country when it doesn’t have jurisdiction over places like Florida, California or in other places we are competing against? This is a global industry,” he said.