Colm Brophy (Dublin South West, Fine Gael)
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I welcome Ms Olivia Buckley, communications director, and Ms Anne Gunnell, senior tax policy manager from the Irish Tax Institute. As they will know, having listened to the previous guests, the committee is engaged in its pre-budget scrutiny process. We look forward to availing of this opportunity to discuss the matter with the delegation.

I wish to advise that by virtue of section 17(2)(l) of the Defamation Act 2009 witnesses are protected by absolute privilege in respect of the evidence they are to give to the select committee. However, if they are directed by it to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

Members are duly reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I invite Ms Buckley to make her opening statement.

Ms Olivia Buckley:

My colleague and I will share a slightly shorter version the opening statement in the interests of time efficiency. We thank the committee for the opportunity to contribute to its deliberations on budget 2019.

In the context of budget planning, the tax base is central to the committee’s discussion. As much as 80% of corporate tax receipts come from foreign multinationals and out of the top 100 largest corporate tax paying companies, only ten are Irish. Many domestic and international bodies have warned repeatedly and consistently of the risks in the our tax base because of the concentrated nature of our corporate tax receipts. The Central Bank, IFAC, IMF, OECD and European Commission have all chimed on the matter in recent months. The consistency of the warnings on the volatility in our corporate tax receipts is matched only by the consistency of the warnings on the need to focus on Irish-owned businesses. While much work has been done on enterprise policy, the need to address the productivity of Irish companies cannot be ignored.

The OECD has warned that the resilience of the economy hinges on unblocking the productivity potential of Irish-owned businesses, while at the same time highlighted that most of them have experienced a decline in productivity over the past decade. Several issues must be tackled if they are to succeed in challenging these and tax policy or tax administration issues will be central to making that happen. The OECD says that we need to give entrepreneurs what they need to grow their businesses and get rid of what is stunting that growth, and that, in some cases, access to finance holds individuals back from taking the step into entrepreneurialism.

The European Commission has also highlighted productivity issues. The IMF has also stressed the need for the productivity growth of Irish companies, including through greater support for innovation, and enhancing partnerships of SMEs with research institutions that would help improve productivity. Our tax policy on collaborative research and development has fundamental limitations in this regard.

A step change is needed if we are to build on the brilliance and ability of Ireland's innovators, entrepreneurs and start-up businesses. We must seek to unlock our potential. Other countries have done so with strategic intent, and so can we. Irish businesses need access to finance, and they also need help and expertise to make the right and the best strategic decisions. They need finance for capital investment, human capital, innovation and research and development that will determine their future success. The impact of policies such as the employment and investment incentive, EII, entrepreneur relief, our capital gains tax rates, the workability of the research and development regime for SMEs, and the effectiveness of our new share options regime are central to the strategic gear shift we need.

My colleague, Ms Gunnell, will outline in detail the issues within most of our critical business policies and tax policies. Some research findings have given us the context for why they are so critical.ESRI research on SMEs show that their investment is below what is expected. The investment gap was more than 30% in 2016 and, therefore, Irish businesses have fallen short. In addition, Irish companies remain heavily reliant on internal funds and on bank financing. Close to 75% of their investment is financed using their own funds, which is substantially above the EU average of 60%. This is relevant when one considers recent CSO reports on innovation, which highlight that a lack of internal finance is the main factor in hampering innovation activities by Irish companies.

The share of SMEs applying for a banking product has decreased since 2015. The interest rates being charged are well above the eurozone average. There is a need to consider alternative financing options such as venture capital and angel investment. These involve people who are willing to undertake riskier investments. It is not just about their money but about smart money. They come with the crucial ingredients that Irish businesses need and that other countries have availed of such as mentoring, global experience, international business contacts and a hands-on advisory role. While the tax system of other countries embraces angel investors, Ireland locks them out.

In light of Brexit, the financing constraints for SMEs are relevant. Research shows that it is likely to deter Irish companies from exporting. It also shows that companies reporting to have experienced financing difficulties are less likely to engage in exporting activities. The reasons Irish SMEs borrow give us an even deeper insight into Irish companies. According to the Central Bank, they borrow for working capital above any other reason. They are below the EU average for borrowing for fixed investment. On the other hand, German SMEs more frequently report using financing for the development of new products, hiring of employees and refinancing of obligations. It is no surprise then that among the German Mittelstand class, more than 42% of SMEs brought a product or process innovation on to the market in 2014. The OECD has warned that Irish companies need to invest more in their own research and development activities, which will drive productivity.

The OECD has also stressed the need for human capital. Ireland needs to think of ways to raise the capacity of businesses to implement new ideas and technologies. We know from research that managerial skills in many Irish companies are too weak to allow businesses to identify and exploit the opportunities offered by global companies and global trade on their doorstep. Wages in multinationals are 64% higher than in domestic companies and the difference is 74% in multinationals of non-EU origin. Under these circumstances, Irish SMEs have difficulties recruiting and retaining skilled workers, thereby hindering their growth and exporting potential, and, therefore, our share option regime becomes critical.

Ms Anne Gunnell:

Against that backdrop, we cannot allow our tax regime to block what is good. We have dedicated agencies, educated talent, the ability of our people and an expanded global footprint within our diplomatic service. We must have tax policies to match that. Given the severity of access to finance for Irish business, I will first address the existing tax measures that promote investment. We have two major schemes, namely, the targeted capital gains tax, CGT, relief for entrepreneurs and the income tax incentive for individuals who invest in Irish business, known as the employment and investment incentive, EII. The backdrop to Ireland's high CGT rate makes analysis of the measures even more important.

CGT is a key determining factor for investment in businesses. It can help or hinder the process. It is unquestionably the tax that matters most to investors and influences their behaviour. When we addressed the committee last year, Ireland had the fourth highest CGT rate in the OECD at 33%. France was at the top of the table. This year, President Macron, in his determined effort to attract more investment into French start-ups and tech companies, slashed the French rate to 30%, pushing Ireland into third place, 13 percentage points above the OECD median rate, a stark position considering what we are trying to do for Irish companies. Our targeted revised entrepreneur relief is important in that, to a limited extent, it helps reduce the CGT burden on the sale of a business. However, this tax measure is uncompetitive. It compares poorly with the UK, which makes London a more attractive location for the investors we badly need. The relief applies to a £10 million gain in the UK but in Ireland the gain is limited to €1 million. From the point of view of an investor, there is no competition between the two offerings. As Ms Buckley mentioned, the relief also locks out the important angel investors who invest not only money but also experience and industry expertise, which are vital factors when we consider the deficit of managerial capability in Irish business, as highlighted by the OECD. While cities such as Paris, Berlin, Stockholm and Tokyo embrace angel investors, Ireland's tax regime excludes them. The impact of this is that business angel investment in Ireland is low compared with that in other countries.

The second financing tax measure of Irish businesses is the EII. It encourages investors to place finance in early stage and small businesses that have limited funding options. Such businesses must very often rely on finance from family and friends. The EII plays a vital role in scaling start-ups and small businesses to the next level of growth. While the scheme is welcome, there are now many blockages within it. Several design features of the scheme are barriers to investment, such as splitting the tax relief into two tranches, the annual investment limit of €150,000 and the revised connected party rules following the Finance Act 2017. The EU state aid general block exemption regulation, GBER, under which the EII operates, also has a significant impact on the scheme and adds to the cost and complexity of claiming EII. It is particularly difficult for businesses seeking to raise a second tranche of EII funding and those wishing to raise EII after having been in operation for seven years. A restrictive administrative process is stifling the use of the relief. The GBER provisions are applied retrospectively to business plans prepared before its introduction. The institute recommends that a full economic analysis of the impact of the GBER on the EII be undertaken and welcomes the consultation currently being undertaken in that regard by the Minister for Finance, Deputy Donohoe.

As Ms Buckley mentioned, Irish companies need the best human capital and talent to increase managerial skills, innovation and research and development capability. Given the high personal tax rates in Ireland, a workable share option scheme that can help Irish small and medium enterprises, SMEs, to attract talent to grow their businesses is essential. We welcome the introduction of the new key employee engagement programme, KEEP, which provides an opportunity for SMEs to compete with listed companies to attract and retain such talent. However, the scheme has limitations which could significantly impact its feasibility and, ultimately, its success in achieving its policy aim. Issues surrounding the qualifying criteria for individuals, the design of the remuneration limits and the narrow definition of a qualifying holding company under the scheme rules are creating difficulties for many SMEs in qualifying for KEEP.

Innovation is a central ingredient in the strategic plans for other countries when it comes to growing their SMEs. The link between innovation and productivity has been highlighted by the OECD, the IMF and the European Commission. Ireland has an attractive research and development tax credit regime but administrative blockers are weighing heavily on its success in terms of the low take-up among SMEs. Research undertaken by the institute in 2017 found that only 35% of companies surveyed intended to use the research and development tax credit over the next 18 months, although that would rise to 62% if there were more clarity on the criteria for qualification. Of significant concern is the fact that the research and development tax credit regime restricts outsourcing and collaboration, a condition that is at odds with best practice by international standards, which actively promote outsourcing and collaboration with the university sector. In Germany, the incentives are aimed at collaboration and partnership with universities is key.

From our submission in 2016, members will be aware that one of the key challenges in our current tax policy making process is the insufficient time available to scrutinise legislation announced in the budget. Apart from key income tax changes and other sensitive measures, we believe that tax legislation should be published for consultation in advance of the finance Bill. This could be done on an issue-by-issue basis throughout the year in the same way that consultation takes place on important policy matters such as controlled foreign company rules, share options and the tax treatment of entrepreneurs. In their 2017 report on tax certainty, the IMF and the OECD stated, "Legislative and tax policy design issues are a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and the frequency of legislative changes." Given the importance of all the anticipated complex changes to the Irish tax code over the next two years arising from the EU anti-tax avoidance directives, the mandatory disclosure directive and the Coffey review recommendations, it is imperative that we address this problem. I thank the members and we welcome their questions.

Colm Brophy (Dublin South West, Fine Gael)
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I thank the witnesses for their opening statements and for their attendance. It has been a very long day for the committee and all members have received a copy of the witnesses' opening statement, which we appreciate. Due to business being conducted in the Dáil, we are currently somewhat short of members. I call Deputy O'Brien.

Jonathan O'Brien (Cork North Central, Sinn Fein)
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On the EII, the additional documentation provided by the institute states that the cap of €150,000 is not working. The cap of £1 million on the equivalent scheme in the United Kingdom is mentioned. The institute is calling for the cap in Ireland to be raised to a similar amount. The documentation also mentions its extension in terms of the universal social charge, USC, and pay-related social insurance, PRSI. What impact would that have? There are other issues to be considered in terms of the backlog in processing the incentive. Must all elements come together for it to work effectively or should some recommendations be fast-tracked?

On the importance of human capital, as mentioned by Ms Gunnell, I acknowledge that the Government has spoken on the issue. The witnesses' written submission states, "The Government’s National Planning Framework also acknowledges the role of human capital, seeing it as “central to Ireland’s success and our economic and social development"." The employee share option scheme brought in by budget 2018 is one of the measures implemented by the Government to try to recognise the importance of that human capita. What impact has that had or is it too early to say?

A question I have asked all witnesses today regards whether we have a broad enough tax base in this country and, if not, where is the potential for us to broaden it?

Colm Brophy (Dublin South West, Fine Gael)
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I also have a question for the witnesses, who can then reply to both me and Deputy O'Brien. I ask Ms Gunnell to further tease out the criticisms she highlighted in regard to the KEEP in terms of why she thinks it is not working and what changes are needed to deliver a more satisfactory programme.

Ms Anne Gunnell:

On the EII, the first and foremost thing we would ask for is an economic analysis of the impact of the GBER on the EII. That is critical. The EII was brought within the regulation in 2015.

It is causing a lot of the administrative difficulties and the backlog, because people are uncertain as to the qualifying criteria. One may have prepared a business plan five, six or seven years ago but one would have needed to see one's future investment needs at that time. The prescriptive approach and the detail required are causing some of the administrative blockers. We welcome the consultation being undertaken by Indecon on behalf of the Minister at the moment.

Deputy O'Brien referred to the limit of €150,000. We have received feedback on this. We have a small pool of investors and some might find it difficult to get up to the level of funding required. There would need to be a larger number of investors at €150,000 and the limit is much higher in the UK.

Jonathan O'Brien (Cork North Central, Sinn Fein)
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Is the €150,000 a cap for the business or the investor?

Ms Anne Gunnell:

It is for the investor.

Jonathan O'Brien (Cork North Central, Sinn Fein)
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He cannot invest €150,000 in several-----

Ms Anne Gunnell:

No. It is his limit. We welcomed KEEP when it came in but it has some limitations. The remuneration limits are causing difficulty, particularly the share option arm of the scheme where a share option cannot exceed 50% of annual emoluments. In the high-tech sector, companies with high potential which are in the start-up phase are cash strapped and have cashflow issues so they incentivise employees by offering a higher proportion of pay in share options with a lower proportion in salary. They will not qualify for KEEP. Also, under KEEP, an individual has to work full-time for a single company. An employee may, however, devote substantial time to KEEP company but if there is a holding company he or she may have some duties to carry out there, meaning they do not meet the test. The legislation also states that a holding company must wholly own the shares in a KEEP company and not be doing anything else. However, a holding company may have a bank account to meet expenses or to receive dividends and that causes difficulty.

Some SMEs will not have an exit or a third party sale and they may not list so they may need to create liquidity in their own shares by another employee buying the shares or the company buying back its shares but none of that is provided for in the legislation and only new shares qualify for KEEP. The scheme only started this year but this is what we are hearing at this stage about the difficulties people are encountering as they see whether they qualify.

Jonathan O'Brien (Cork North Central, Sinn Fein)
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Is a review being undertaken?

Ms Anne Gunnell:

Not that I am aware of.

Ms Olivia Buckley:

In our research and our analysis of what is happening in Ireland and other countries, we have seen a lot of good work and good foundations for getting our start-ups and entrepreneurs established. I refer to local enterprise offices and Enterprise Ireland, which give companies a lot of support, especially those that are export-ready or export-focused. We have a very well educated workforce and graduates who are the brightest and the best and, as a country, we are putting a lot of energy and effort into them.

This week we are using our diplomatic embassies for expansion and trade and to reach out to the world. However, we find that key areas of our tax policy are holding us back. We do not have many tax measures. We have the EII, entrepreneurs' relief and relief for research and development, as well as the share option regime, but we must make all these work if we are to have any chance of fulfilling our potential and that of the entrepreneurs around the country who want to be a success but need financing and human capital to make it happen.

There was a question on the tax base. When we have a debate on a budget, it is hard to know where to get extra money from because there are many issues regarding all the taxes. We want to be fair in a very squeezed and rising property market and we do not want to punish people whose incomes may not match the valuation of their property. We are already getting a huge and disproportionate amount of money from corporate tax and personal taxation accounts for a very high percentage of our overall tax base, at around 40%. A lot of people with low to middle incomes have very low tax bills by the standards of other countries. We do a study every year of eight competitor countries and we know that we have a very low contribution but there has been much discussion about the pain people have gone through in recent years and the fact that the cost of living is very high in many areas.

Over many years of engaging with this committee and the finance committee, we have focused on the fact that we can only grow our tax base by growing the activity of our Irish enterprise. All the international agencies and bodies tell us that we cannot afford not to have the necessary resilience and not to fulfil our potential. We have a 30% investment gap so while our economy is growing, Irish SMEs are not matching it with investment and innovation and with managerial capacity building. The best way to grow our tax base is to give support to the indigenous Irish sector. The German economy does this very well, although it has been doing it for many decades. It is a very good model - if not to adopt then to adapt - and we could certainly learn a few things about expanding our tax base.

Colm Brophy (Dublin South West, Fine Gael)
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I thank the witnesses for coming before us today. We have had three different groups and they have all given us guidance. Ms Buckley echoed a point made by somebody from IFAC earlier, which was that the original idea of bringing multinationals into Ireland was to create an overspill and grow indigenous companies. We have been successful in the international sector but our indigenous SME sector still needs some work. The contribution of witnesses today will feed into our work.