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.