Ireland has become "seriously uncompetitive" in terms of taxation with the country's high captial gains tax rate proving to be a major barrier to creating jobs and encouraging entrepreneurship, according to a pre-Budget submission by the Irish Venture Capital Association (IVCA).

The submission points out that capital gains tax in Ireland is charged at 33 per cent while in the US, gains on assets held for more than 12 months are taxed at a maximum rate of 20 per cent. Closer to home, the rate in the UK meanwhile is between 18 per cent and 28 per cent but Entrepreneurs’ Relief can reduce this to as little as 10 per cent.

The IVCA said more favourable tax rates and incentives elsewhere means that many Irish entrepreneurs are seeing the benefits of setting up their business away from the Republic.

"In Ireland there is no distinction made between entrepreneurial gains and purely speculative, non-productive gains. No account is taken in either the income tax or capital gains tax codes of the reality that many entrepreneurs might have paid themselves a subsistence salary, or nothing at all, for several years in order to build their business," added John Flynn, chairman, IVCA .

The organisation suggests that a lower capital gains tax rate of between 12.5 per cent to 15 per cent be linked to innovation activities as defined under existing tax legislation. It said a higher rate could be maintained for speculative non-productive gains such as property investment.

“The funding crisis for SMEs is a direct result of an historic over dependence on debt which is currently in short supply. These companies should be encouraged to raise equity and the tax system should incentivise this approach instead of disproportionately rewarding investment in property,” states the report submitted to the Minister for Finance.

The association added that a reduction in the capital gains rate should result in no cost to the State for the next five years as it takes at least that to develop a company to the stage where an exit or sale is feasible.

“The fact is that Ireland has become seriously uncompetitive in terms of taxation. The tax environment for productive investment has steadily deteriorated over the last five years. Unless action is taken, then the Government’s aim of making this a great country in which to start and grow a business lacks credibility. More worryingly, lack of action threatens the incentive to build businesses and create jobs in Ireland,” added Mr Flynn.