Examination of Witnesses (Questions 20-39)
MR VINCENT
SHERIDAN, MR
EAMONN DONAGHY
AND MR
BRIAN KEEGAN
27 FEBRUARY 2008
Q20 Sammy Wilson: I just want to
take one more point on the corporation tax. I imagine that another
way in which firms make decisions is to look and talk to other
firms who have invested. The Chancellor here has indicated that
although we have a 40% corporation tax, very few firms pay it.
I think only 30% of firms pay the top rate in Northern Ireland.
It is considerably less than that because of allowances, et
cetera. So when firms are looking at investment locations,
do they not speak to other firms and whilst the headline rate
of tax may be a certain amount, the actual amount of tax paid
can be judged on what similar firms are paying in the same region,
and therefore does the headline rate not become a little less
important?
Mr Sheridan: We are queuing up
to answer that question.
Mr Donaghy: I think you are absolutely
right, the headline rate is not something that necessarily paid
by other organisations. It was a bit disheartening that an argument
was being put forward that only 3% of companies in Northern Ireland
pay tax at the higher rate. I think I would have to say that with
the continuing tax regime in Northern Ireland that we have that
we will never get above 3%. The objective is to encourage and
stimulate large companies to come to Northern Ireland to generate
profits. That is what our objective is. It is not necessarily
to facilitate existing companies to reduce their tax bills. I
think headline tax rates are significant in the world of FDI on
the basis it is something that can be directly comparable. You
are absolutely right, the world is much more difficult than that,
and the calculation of tax is a lot more difficult than that,
but I think in terms of headlining, getting on to the lists, getting
down to the final decision tree, it is very important and the
headline corporation tax is always considered. There are obvious
ways of reducing that which could be factored in. We find it difficult
to be able to determine exactly what the effective rate of corporation
tax would be. Of course models can be done to look at that but
when it comes down to the final analysis for large corporates,
the FDI type of investment that we would love to attract in Northern
Ireland, the headline tax rate is one of the key determining factors
when the rest of the shopping list has been looked at.
Mr Sheridan: I think the attraction
of a low corporation tax rate is that it is sustainable long term.
In the Republic we went through a period when there were all kinds
of allowances available and they were very widely available, but
a company looking to invest might find that they would have quite
a low real tax rate during a period of very high capital investment,
there might be double capital allowances, but it is not nearly
so attractive as knowing that when you actually get through that
period and the profits start coming in then there is going to
be a lower payment of tax. I suppose the proof of the pudding
was that the real growth in foreign direct investment followed
on the introduction of a permanent low rate of corporation tax.
Q21 Sammy Wilson: You mention, and
this Committee has looked at it in the past,- other taxes—capital
taxes, indirect taxes and income taxes—and the differences
there. We have seen the impact that has on certain businesses,
fuel tax, et cetera, between Northern Ireland and the Republic.
How important do you believe the alignment of those taxes between
the two parts of the island are?
Mr Keegan: I think they are certainly
contributing factors. Taking the obvious one in terms of income
tax, obviously the income tax rate and the rate of PAYE applying
to employees has a direct bearing on the attractiveness and the
costs of establishing a business. In terms of the turnover taxes,
things like value added tax, they essentially are consumer taxes.
I know you know that better than I do, so for that reason if you
have a policy which in general has a higher number of well-paid
employed people in a region, those kinds of receipts are going
to go up. In terms of capital taxes, the primary one being capital
gains tax, I think it is only fair to say that probably in very
many respects the UK regime is more favourable than the Irish
regime in terms of the relief that is available and in terms of
the recent initiatives announced by your Chancellor, so they are
very, very important. They are though important in terms of being
a consequence of rather than key to the investment decisions.
Mr Donaghy: Can I just say a couple
of things. First of all, it is important to realise that we are
not looking to put more money into the pockets of the Northern
Ireland businesses and business owners. What we are trying to
do is to attract foreign direct investment to locate and retain
and reinvest the profits that they generate. This is not an attempt
to try and reduce the overall tax burden of the entrepreneur in
Northern Ireland. It is a genuine attempt to try and encourage
businesses to come to Northern Ireland. I think one of the other
impacts of the other taxes is that with economic stimulus and
growth it creates other jobs and it creates wealth, and the payback
in terms of PAYE, national insurance and capital gains tax will
be something that can counter the reduced corporation tax that
is likely to arise in the short term. As shown in the Republic
of Ireland, the corporation tax take rate has still increased
even though the tax rate was reduced. I think the overall impact
of taxes has to be compared. We are not calling for the equalisation
of all the taxes on the island of Ireland and there will be differences
and we fully accept that, but the whole concept of a reduced corporation
tax rate is to act as an economic stimulus and to encourage reinvestment
into Northern Ireland.
Chairman: A number of people are trying
to get in, I will call John Grogan, then David Anderson and then
Alasdair McDonnell.
Q22 Mr Grogan: What have been the
trends in foreign direct investment in Northern Ireland since
the Good Friday Agreement?
Mr Donaghy: I think it is difficult
to analyse that in great detail. There has been a significant
number of service centres, call centres and back office centres
that have been brought to Northern Ireland, which is fantastic
in creating jobs but the problem with those types of investments
is that when employment costs elsewhere become significantly lower
those businesses tend to move away. The roots are on the rock
as opposed to in the soil so it can be easier to go away. There
has not been a significant amount of inward investment of the
type we would hope, which is long term and sustainable, to make
Northern Ireland the centre of a European operation and encourage
them to try and make profits.
Q23 Mr Grogan: Do you think you could
be accused of concentrating on one sector, albeit a very important
sector? You keep on about high-tech services and so on but still
manufacturing investment is quite important. You talk about back
office investment and that is very important as well in many ways
and the United Kingdom as a whole has got quite a good record.
It is true, is it not, that we have got a much bigger share than
we would deserve per head of population of foreign investment
in the European Union. Do you think you could be accused of just
concentrating on one sector?
Mr Donaghy: I think the slight
differential that we have is that—and we have coined a phrase—we
are north of the Watford Gap and on the wrong side of the Irish
Sea. We also have a land border with a jurisdiction where the
rate is 12.5%. Northern Ireland is absolutely part of the United
Kingdom but we are different in many respects from other parts
of the United Kingdom and therefore being at the far end of the
United Kingdom means that we are potentially being overlooked.
Q24 Mr Grogan: Could I put it another
way: are you in danger of being hoist by your own petard? You
are coming up to a very important conference and your message
could be that we are part of the United Kingdom which does get
a more than average share of foreign direct investment; we have
got many advantages as compared to the Republic, as we have heard
about, in terms of the cost of offices and presumably other accommodation,
in terms of wage rates, a very highly skilled and educated population,
and so on, and we are really proud of that and we are a good place
to come. Is not the danger that the message you are coming across
with is you are emphasising one particular factor which you say
is not in your favour and the danger is that it will become a
self-fulfilling prophecy, and would it not be better to emphasise
the many positive advantages to coming to Northern Ireland? Would
that not be a better way forward?
Mr Donaghy: I agree entirely with
you and we are in favour of emphasising any positive economic
advantages that Northern Ireland will have. My own experience
is of course slightly different in that when one has discussed
this with senior executives in multi-national organisations that
when they come to make the decision, it is not as if this is hidden
under a stone and nobody knows about it. They know fine well what
the corporation tax rates are in the North and what they have
been in the South. This is not a silver bullet; it is not the
only answer. The difficulty of course is that it is there, it
is sitting in the room and everybody knows it is there, so us
articulating this and saying we think this might be a problem
is not going to make the other organisations say, "Oh, it
is a problem." They know it is an issue, they know it is
a problem, and what we are trying to achieve is a way of being
able to take that problem out of the room to give us a level playing
field with our other competitors, both the Republic of Ireland
and other competitive FDI locations.
Mr Sheridan: Could I just say
that it is certainly the Institute's wish to do everything possible
to support the Investment Conference and we would not want to
be seen to be negative, but we see this as being absolutely central
to economic development. We made submissions to the Varney Report.
Our request to the Committee to meet and to give evidence was
in relation to the Varney Report. We took the view that we had
to respond to the Varney Report, so that is what is driving us,
not anything else. If I can get back to the sector that you are
talking about, I think it is more deep-rooted than that. I think
there are a number of things. Mobile foreign investment is increasingly
centric on service-type industries. There is a reputation which
has been gained for the island in a number of industries which
is tremendous in a lot of ways—pharmaceutical technology,
life sciences, financial services—and that is there to be
exploited. I think it is relatively easy to exploit that. It just
needs a key to turn to open that door. To overlook that would
seem to me to be a major mistake.
Chairman: Dr Anderson --- Mr Anderson?
Q25 Mr Anderson: Not yet and do not
hold your breath! Have you looked at the economic impact on the
rest of the United Kingdom if this goes ahead? Clearly it is going
to be an advantage for where you are living but it will be a big
disadvantage for where I live.
Mr Sheridan: Brian, you have considered
this in a number of headings. We do not see that at all but Brian
has looked at the displacement issues.
Mr Keegan: First of all, Mr Anderson,
the overriding consideration is that the Exchequer has a very,
very high level of subvention to Northern Ireland. That clearly
is a very real cost to the economy. We feel that by stimulating
economic growth in Northern Ireland that cost can be managed and
contained so we feel there are going to be immediate savings in
relation to that. Our second contention is that over the short
to medium-term a reduction in a particular corporation tax rate
in a particular region will be revenue neutral. I suppose the
issue is in terms of how that benefit is managed within Northern
Ireland in relation to the other regions. I suppose anywhere,
whether it is a territory or whether it is a country, where a
reduced rate is applied, there will always be attempts to tax
plan to try and maximise the benefit of that rate without necessarily
benefiting the region and the economic activity that would be
put in place to foster. In terms of how that would be managed,
there is an awful lot of international precedent in relation to
matters such as transfer pricing and in relation to matters such
as preventing individuals from incorporating activities purely
for tax reasons. There are mechanisms for ensuring that the benefits
will not be limited to the particular region to generate the economic
activity for which they are designed. We have set down in a certain
amount of detail quite a few of those considerations. From our
own direct experience, certainly from our experience of dealing
with this issue in the Republic, there are legal mechanisms in
place to ensure that unnecessary distortions cannot arise.
Chairman: Could I ask you to make your
answers just a little crisper and shorter because I do not want
to cut short the questioning but we do need to get evidence as
crisply as we can. Mr Anderson?
Mr Anderson: Perhaps I should have been
a doctor because I did not understand what you said. The reality
is if a company—and I will use the example of Orange—wants
to open a call centre, and we have got a big call centre in the
north east of England, if had come to Northern Ireland instead
of the north east of England because you can offer a better deal
on corporation tax, that has got to be detrimental to the north
east of England, surely?
Chairman: The point Mr Anderson is making
is we all accept that Northern Ireland is part of the island of
Ireland and you are arguing a case, perfectly legitimately, but
Northern Ireland is also part of the United Kingdom, and Mr Anderson
represents an area of the United Kingdom which has had its share
of deprivation and which has done its best to attract inward investment.
The point he is putting to you very clearly and very simply is
this: if we have a differential tax regime within the United Kingdom,
it might have certain benefits with you in Northern Ireland but
would it not have offsetting disadvantages for other parts of
the United Kingdom? That is your point, Mr Anderson, is it not?
Q26 Mr Anderson: Absolutely.
Mr Keegan: The best observation
I can make directly in relation to that is that surely it is best
all round to ensure that those kinds of investments remain within
the United Kingdom, whether they are located in Northern Ireland
or otherwise, taking completely Mr Anderson's point. The increased
attractiveness of Northern Ireland as a locale would increase
the attractiveness overall of the UK as a locale for foreign direct
investment.
Q27 Mr Anderson: Can I come back
to where the President started about the politics of this. What
you are saying to me is that I have got to go and tell the people
of my area that we have got to give people in Northern Ireland
a boost in their economy by reducing corporation tax, they already
get a third more per head of public money spent on them at this
moment in time, and we will receive £300 million less into
the Exchequer as a result of doing this, and that is a good deal
for the people in my area?
Mr Donaghy: Can I address some
of those points, Mr Anderson. Certainly I cannot say to you for
definite that there would not be either a migration or a reallocation
of jobs.
Q28 Mr Anderson: That is the whole
point of what you are doing, is it not? That is why you are doing
it; you want companies to come into the place.
Mr Donaghy: Yes, we want companies
to come into the place.
Q29 Mr Anderson: That means our jobs
will go somewhere else.
Mr Donaghy: Yes but the somewhere
else maybe another low-tax jurisdiction. Our constituency does
not offer a low-tax jurisdiction. What we are hoping to do is
create a place in Northern Ireland where this investor would consider
coming to Northern Ireland. A call centre could go to Dublin,
it could go to Bangalore, or it could go to Singapore. I think
that certainly from an economic point of view, I could understand
why you would prefer that to come to your constituency. We are
not advocating displacement of business that is already in the
UK or might consider coming to the UK. Yes, what we are hoping
to do is to try and encourage businesses that would not be considering
the UK in the first place. I understand the difficulties you may
also have about the £300 million. I think that the figures
that have been produced in the Varney Report certainly are mathematically
possible, and statistically and economically I am not sure that
I necessarily agree with them. Any set of economic projections
or any model that you might be able to pull together is subject
to the conditions that you put into the model and the assumptions
that you make. Certainly another model that has been produced
by the Economic Research Institute of Northern Ireland came up
with a different analysis and different models. What we firmly
believe is the actual model to look at is not a piece of paper
on academic research; it is the model that is the Republic of
Ireland. The impact in the Republic of Ireland is that there has
been increased tax revenue all the way through. That means that
not only will it not cost in the long term £300 million a
year, in our view, but it will actually be a net contributor to
the UK Exchequer. Therefore we are not saying we want a hand out;
what we are looking for is a hand up.
Q30 Mr Anderson: Does that not only
work if we take as read what you have said in your letter to us
that the only contributing factor to the Irish Republic's development
has been the reduction in corporation tax, not everything else
that has happened in the Republic of Ireland?
Mr Donaghy: Hopefully that was
not what was in our report.
Q31 Mr Anderson: "... only the
cut in corporation tax rate successfully acted as a stimulus to
wider economic growth."
Mr Donaghy: I think it was the
final piece that pushed it over the edge. I think maybe the President
can talk about that, but there were a whole lot of other factors
at the time. A lot of those factors would have been present in
Northern Ireland absent the political situation we had at the
time and the other difficulties we had, but certainly nowadays,
where those hopefully have been put to our past, when we compare
like with like, I do not believe that corporation tax is the silver
bullet but I do believe if a jurisdiction beside us has it and
we do not have it, it is going to make it very difficult for us.
Q32 Dr McDonnell: Surely the point
is—and I am going to put this to you bluntly—the agenda
here is not to suck jobs out of Newcastle or out of Wales but
to suck jobs out of an overflow of business in the Irish Republic
where the exhausted labour market has been fulfilled in Dublin
and where there are companies that might have come to the Irish
Republic but find there is a labour shortage there or find they
are not able to get staff and step north? Is that not ultimately
the agenda? It is to my mind.
Mr Sheridan: The agenda is to
get more investment into Northern Ireland and Northern Ireland
competing with the Republic is going to find it very difficult
to get over that hurdle without lower corporation tax. There are
problems of having a very successful economy such as labour shortages
but if you talk to the Industrial Development Authority, who are
the people who seek out the jobs, they have a very full book of
interested inward investment opportunities facing them. Although
there is a very big rate of employment and a low unemployment
rate in the Republic, we have proved remarkable at getting immigration
into the country to sustain further growth. It has slowed down
a bit now. Certainly some of the investment that would go to Northern
Ireland if it was able to compete on level terms with the Republic
might be to the loss of the Republic. Fair call, but there is
so much out there. If I can use the opportunity to make the point
Mr Anderson made, I do not think that the Orange call centre is
at risk. My own company runs a large call centre and if we were
ever to move it from the midlands of Ireland, we would move it
to India. That is the threat. We need to attract new investment
and there is no other part of the United Kingdom that has quite
the same competition across a land border as Northern Ireland
has. It is very difficult.
Q33 Dr McDonnell: Can I come back
here because I am trying to get to the nub of this. Surely the
nub of our situation as a whole is there is a high level of subvention
in Northern Ireland. The current regime is possibly more generous
in some ways and you could suggest, if you go through all the
detail, that there is a lot of generosity and that probably costs
the Chancellor more than the Irish system costs them, but it is
so complicated and hard to sell and hard to exploit and hard to
understand that a lot of US investors' eyes glaze over after the
third or fourth angle on it and they think that our system in
the North is so complicated whereas the Southern Irish system
is simple and straightforward of a 10% tax rate and 1% tax, which
is understandable and easily sellable. Is that not the issue?
Mr Sheridan: I think that is the
nub of it. One of the points I made in my opening statement was
that the experience in the Republic in reducing the rate of corporation
tax was such a simple approach to the issue and it actually increased
the revenues from corporation tax. This has been no point over
the last 20 years where the graph of corporation tax receipts
in the Republic has not continued to go up. That does not happen
with complicated allowances and marginal changes to these allowances
every year. It is too complicated and there is no certainty with
it going forward whereas the other is simple and straightforward.
People make investments at the point of the projections that supports
the investment decision, which must be backed up in the first
instance by profit.
Q34 Dr McDonnell: Am I correct to
believe that any initial shortfall or drop in tax will largely
be compensated for within three years?
Mr Sheridan: We think it will
be compensated for within three years just within corporation
tax receipts. It will be compensated much quicker by increased
income tax. It is not just that more people will be in employment
but we think the average rate of pay in the North would move up
towards UK levels at a pretty fast rate and value added tax would
increase. In the Republic now our value added tax receipts are
exceeding our corporation tax receipts and they have been generated
by more people at work and a more buoyant economy. Peter Sutherland,
who is President of a world trade body, recently said that the
two factors that influenced the country's turnover were foreign
direct investment and a low rate of corporation tax, because a
low rate of corporation tax played a huge role in bringing foreign
direct investment into the country, so the rising tide lifts all
the boats in the harbour
Chairman: I am conscious that it is now
4 o'clock and we are into our last quarter of an hour. Did you
want to come in at this point Lady Hermon and then Mr Pound?
Q35 Lady Hermon: I just wanted to
see if Mr Donaghy had a brief point in response to Dr McDonnell
before I ask my next question.
Mr Donaghy: I was only going to
address the issue in terms of the fact that Northern Ireland has
for a long time had a significant subvention to it from central
government. That has been very necessary over the last 30 or 40
years with the difficulties that we have had. I appreciate that
subvention is something that could be reviewed and considered
as part of the bigger picture, but I think Varney says in his
report that regions that are prepared to take an element of risk
are those that deserve the best rewards. What we are hoping for
and asking for, what we are seeking is that there is an element
of investment into Northern Ireland. This is not a handout and
we are not looking for a handout. What we are looking for is an
investment to stimulate economic activity in Northern Ireland
to help pull us out of a dependency culture and to help us into
a situation where we can be net contributors to the United Kingdom.
The benefactors here are not necessarily just the people of Northern
Ireland but we hope we can contribute to the central funds as
well.
Q36 Lady Hermon: I wonder as a matter
of interest—and I have listened very carefully this afternoon—were
you ever confident that the Varney Review team would recommend
the lower rate of 12.5% corporation tax or did you have the view
at the beginning that when the Varney Review was set up—and
it was set up by the then Chancellor Gordon Brown before the political
settlement in Northern Ireland was achieved—that Varney
was kicking the issue of corporation tax at a lower rate into
touch? Can I ask you to be frank on that.
Mr Donaghy: I will be very frank
with you. I would have been exceedingly surprised if Sir David's
report had fully vindicated our call and said that a reduced rate
of corporation tax at 12.5% would be something that Northern Ireland
should have immediately, so being frank I did not expect that
to happen.
Q37 Lady Hermon: Why did you not
expect that?
Mr Donaghy: I believe personally
the political ramifications to the UK were always going to be
very difficult, for the very reason Mr Anderson articulated, that
the north of England, Scotland and Wales would all be knocking
on the door to say, "We want a share of that as well please."
We are not foolish enough to think that is not an issue; we do
recognise that fully as an issue. However, we have got to focus
on Northern Ireland and look at Northern Ireland's issues and
try and address the economic instability Northern Ireland has
had over the last 40 years, the dependency culture, and the fact
that 40 miles down the road you can set up a company and pay tax
at less than half what it is in the United Kingdom. We do believe
that we have a differential as a result of the troubles and also
because of our location. We are potentially drifting into becoming
an economic backwater. The dependency culture that is there and
the social deprivation that is there, yes, it is present in other
parts of the United Kingdom as well but we have had such a dependency
culture that we have hundreds of thousands of people now claiming
incapacity benefit who are just not in the workforce and are not
encouraged to go into the workforce because there is not sufficient
private sector industry.
Stephen Pound: I want to ask a question
but first of all can I say I greatly valued your opening comments,
President Sheridan, particularly the selfless nobility from the
Dublin perspective for the economy of the North, which I thought
was admirable. I do not know if you are any relation to your namesake
who held this House in such sway for many years—
Chairman: Flattery gets him everywhere
but let us have the question!
Q38 Stephen Pound: However, is not
the inevitable logic of what you say about the corporation tax
differential that if you view this from an EU perspective, taking
Latvia and Cyprus at one end of the equation and Italy and Germany
at the other, the median level of corporation tax in Europe is
in the high of 20%s and after April in the UK it will be 28%,
so is it not more logical to argue for an equalisation of Ireland
up rather than Northern Ireland down?
Mr Sheridan: It depends, I suppose,
where you are sitting, Mr Pound. Can I very briefly answer Lady
Harmon's question because I can say with all honestly, and naively
I would admit (I did not look at it from a political point of
view) that I was very hopeful and then very disappointed when
the report came out negative on two simple points. Firstly, I
believed that any writer of any report on economic development
in Northern Ireland must have seen the importance of foreign direct
investment. Secondly, I could not see any way that you could be
optimistic about foreign direct investment into Northern Ireland
without having a competing rate with the Republic. It is a matter
of absolute all-party agreement, all-elector agreement—and
we have seen the result of having a lower corporate tax rate—that
that is central to our economic policy and the right that Europe
cannot vote away tax rates is central. Much as we all love the
European Union, I suspect that our membership of the European
Union would be put at risk if that was interfered with.
Q39 Stephen Pound: I was not implying
fiscal harmonisation, although personally I see the logic of that,
it just seems to me that if you look at this from the perspective
of as much coolness as possible, it would seem that the country
out of step is Ireland and the country in step is the United Kingdom.
Mr Sheridan: That is absolutely
true, Mr Pound, but look at the results. The results have been
spectacular. The Republic in the 1980s was not a great place to
be. I was there, I worked there; it was not a great place to be.
You crossed the border into Northern Ireland and there was every
evidence of economic prosperity. The 1980s is not that long ago
and it was a very bleak time in the Republic and we did not see
how the objective of economic development was going to be achieved.
A lot of things came together and I made reference to them early
on, but the belief is a strong widespread belief—and one
that I share—that the key and the biggest single ingredient
and the stimulant that brought the others together was this low
rate of corporation tax.
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