FOR centuries, illicit poitin has been the only tax-free commodity on Ireland's islands -- despite the best efforts of the English who first introduced a levy on distilled spirits in 1660 to pay the debts incurred by Cromwell's wars.

Now, under proposals put forward by Udaras na Gaeltachta, all the Irish islands could become tax havens -- modelled loosely on the tax-free principality of Andorra.

The regional authority responsible for the economic, social and cultural development of the Gaeltacht has proposed a radical plan to the Commission on Taxation recommending a special taxation incentive scheme for islands.

The islands that could benefit from a change in tax status include Tory and Aranmore islands in Co Donegal, Clare Island in Co Mayo, the Aran Islands and Inishbofin in Co Galway, and the Co Cork islands of Cape Clear, Bere Island and Sherkin Island.

Making the islands tax-free would promote economic activity on them and attract people to live there. The last three censuses taken in Ireland have each shown a decline in population.

One part of the proposal is a pilot scheme that people living on these islands for at least six months of the year would be able to earn €100,000 a year tax free for 10 years -- even if they earn their money on the mainland.

The exemption would apply to both new and existing businesses on the islands.

Udaras has also proposed having a 100 per cent capital allowances/free depreciation write-off for any equipment or buildings provided for use in a business allowable against non-exempt income and a BES-type tax relief to apply to investors who invest capital in any business located on the islands.

They also propose a VAT-refund scheme to be implemented for community-based activities that require capital expenditure on buildings and fit out.

Padraig O hAolain, CEO of Udaras na Gaeltachta, said: "While the infrastructure of our offshore islands has been substantially upgraded in recent years -- and substantial State investment is currently being made in this sector -- and while access via air and ferry services has been greatly improved, the overall population of the offshore islands continues to decline.

"As far as our function of enterprise promotion is concerned, the most challenging task for us is to create new employment and income-enhancement opportunities for island residents and especially for young islanders and islanders wishing to return to reside on the islands. We feel this is what holds the key to the future viability of the island communities."

At the moment, only 3,000 people could be described as permanent residents of the islands.

The proposal is aimed at all islands, both within and outside the Gaeltacht.

Mr O hAolain says the proposal has a relatively modest overall potential cost to the exchequer, but is believed could have the effect of giving a huge boost to the future sustainability of island life.

Europe has a number of tax havens, including the small principality of Andorra, which has a population of just 65,000.

Companies and individuals pay no taxes in Andorra though there are annual registration fees, rates and property transaction taxes.