Corporation Tax in Northern Ireland

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE    To be published as HC 558-i

Northern Ireland Affairs Committee

Corporation Tax  

Wednesday 27 October 2010

Eamonn Donaghy, Victor Hewitt

Jeremy Fitch

Brendan Morris, John Whiting, Martin Fleetwood

Evidence heard in  Public Questions  1 - 81

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the  Northern Ireland Affairs Committee

on  Wednesday 27 October 2010

Members present:

Laurence Robertson (Chair)

Mel Stride

Gavin Williamson

Jack Lopresti

Oliver Colvile

Ian Paisley

David Simpson

Mr Joe Benton

Ian Lavery

Naomi Long   

________________

Examination of Witnesses

Witnesses: Eamonn Donaghy, Head of Tax, KPMG Belfast; Member, Northern Ireland Economic Reform Group; and Chair, Tax Committee, Institute of Chartered Accountants, and Victor Hewitt, Director, Northern Ireland Economic Research Institute and Member, Northern Ireland Economic Reform Group, gave evidence.

Q1 Chair: Okay, can I welcome you to the Committee? This is the very first session we are holding in our inquiry into the levels of corporation tax, with particular reference to the levels in Ireland, so we consider it to be a very important inquiry. It is also the first inquiry that this reformed Committee has held since the election, so that is the importance that we attach to it, when there are so many other issues that we want to come on to. So we consider this to be a very important issue. Can I perhaps just ask you to introduce yourselves and tell us a little bit about your organisation and what it does-what its aims and objectives are?

Eamonn Donaghy: My name is Eamonn Donaghy. I am Head of Tax at KPMG in Belfast. I am a member of the Economic Reform Group, which Victor, my colleague, will tell you a little bit more about, and I am also Chair of the Tax Committee of the Institute of Chartered Accountants. So I suppose I have three different hats on today, and I am happy to represent all three.

Victor Hewitt: My name is Victor Hewitt. I am the Director of the Northern Ireland Economic Research Institute. I am also a member of the Economic Reform Group. The institute has been involved in the issue of corporation tax since about 2006, when we did our original paper on it. The Economic Reform Group has revised that paper and brought it forward and we are happy to be here today.

Q2 Chair: Okay. What about the organisation? Are you a campaigning organisation or an advisory organisation?

Victor Hewitt: It is an advisory body. It is an independent economic research body; it is actually an NDPB, operating to the office of the First and Deputy First Minister. But it is set up for doing economic research for the general public good and for doing consultancy work for Government Departments.

Eamonn Donaghy: The Economic Reform Group, just to clarify it for the Committee, is a voluntary organisation where seven individuals-a mixture of economists and accountants-come together to try to and prepare the case for a reduced rate of corporation tax, because, for want of a better word, we believe passionately that this is the right way for Northern Ireland to proceed. We are here as volunteers as opposed to paid hands.

Q3 Chair: Okay, thank you for that. One of the things that is provoking the discussion and the inquiry is the fact that, statistically at least, Northern Ireland underperforms in terms of economics. Obviously, we are conscious of the effect that the Troubles have had over many, many years, but what do you see are the economic reasons for that underperformance?

Victor Hewitt: Perhaps I will take that. You are quite right about the underperformance. During my lifetime, my father’s lifetime and probably my grandfather’s lifetime, Northern Ireland has always been down in the bottom three of the UK regions. It has never exceeded 80% of the UK average in terms of productivity and output. Now, this is not for want of trying by Government, because very large quantities of money have been thrown at this problem in terms of infrastructure and of grants to try to bring in foreign firms in particular to transform the underlying base of the economy. Despite that, we are still below 80% today.

One of the reasons why we are particularly interested in this policy instrument is that, in a sense, it changes the game, because all the previous policy instruments have been designed around promoting Northern Ireland as a relatively low-cost place to do business. The labour costs are low relative to the educational levels available; there are grants for capital and so on. All of those things attack the cost base and therefore attract companies that are interested in pressing costs down. In a sense it becomes a bit selfdefeating, because there are always going to be countries round the world that can offer a lower cost offer than you, especially on labour.

The corporation tax, on the other hand, is a different instrument. It essentially would promote Northern Ireland as a profit location, rather than a cost location. It would be saying that Northern Ireland is a good place to make profits and to keep them. So it is a qualitatively different instrument from the other instruments that we have. It has been very successful in the Irish Republic. I know there are a lot of stories around other things, and of course there are other things, but in these other things we are not vastly different from the Republic. Our education system is at least as good; our training is up to the mark; our infrastructure in many respects is even better. So when you take those into account, the really important thing in the Republic has been a low corporation tax allowing companies to retain more profit. It has therefore attracted a very large number of high valueadded companies and it is continuing to do so. Over the past 10 months, it has attracted yet another 50 companies worth 5,000 jobs, even in the depths of the recession. These are quality companies; they are not there for a fast dollar.

Eamonn Donaghy: I would just like to add a little bit to that in terms of the economics. Sometimes we can get lost in theoretical models and concepts that are maybe difficult for people to understand. I think a real living and working model to the benefit of a low corporation tax jurisdiction has been the Republic of Ireland. Unfortunately, previous inquiries seem to have somehow been able to determine that low corporation tax has had no impact on the growth of the Republic of Ireland, which we find very difficult to understand. I think, as Victor has indicated, the benefit of low corporation tax has been highlighted over the past 10 to 12 months, where the Republic of Ireland has had a very difficult time, for all sorts of well-documented reasons. The fact that the Irish Government have not changed the corporation tax rate in the last 18 months I think is a very clear indicator of how they would regard this as an important tool to attract FDI. They have raised income tax, they have raised VAT, they have raised all the other taxes, but they have steadfastly retained corporation tax at 12.5% and not just the Government but all the opposition parties have gone on the record to say that they want to keep the 12.5% rate as a key part of their economic and fiscal policy. I think that has to be a clear and living reason why low corporation tax is very important for a small economy.

Q4 Chair: Are there any other economic reasons why Northern Ireland underperforms? Obviously the impact of the Troubles was a major impact. It might account for 90% of the reasons, but do you see any other reasons apart from corporation tax, obviously, which is why we are carrying out this inquiry? Are there any other economic reasons there?

Victor Hewitt: Well I suppose one of the consequences of the Troubles has been a relative growth of the public sector to take up the slack. At the height of the Troubles, we were bringing in less than 100 jobs a year at one stage. So the public sector consciously expanded and that has unbalanced the economy to some degree. Obviously, we are now seeing the coalition Government attempting to rebalance the economy in the UK and Northern Ireland is not escaping that attention. When you set in train long-term trends such as growing the public sector, it has effects upon the output level of the economy. Of course, the public sector does not have the same productivity drivers on it. So I suppose that is one particular issue.

Eamonn Donaghy: I would just add, I suppose, that unlike Scotland, we do not have oil off the shores. I suppose our greatest natural resource has been our people. Certainly, people from my generation have long since had to leave the shores of Northern Ireland to find themselves better and wellpaid jobs. Unfortunately, when your best people are forced to leave because there are not jobs, that is going to have a huge impact on the long-term future of the economy. So the idea behind this, ultimately, is the creation of long-term, stable and well-paid jobs to try to keep the people of Northern Ireland in Northern Ireland and to try to attract some of those who have gone away to come back. Therefore, I think one the key drivers has been the fact that we have lost a lot of our very talented people to other parts of the world.

Chair: Good point, yes. Ian Paisley.

Q5 Ian Paisley: You said it is a game changer. Is it the only arrow in the quiver of ideas that can be fired at the productivity gap?

Victor Hewitt: It is a different arrow; as I have said, it is a qualitatively different arrow. All the other instruments we are talking about are effectively ways of attempting to persuade companies to do things on what you might call the input side: to train their work force and to do more R and D-all the things that we think are going to drive output levels up. This is more of a carrot at the other end, the output end, where you are trying not to tell a company how to do its business, but rewarding it for being profitable. That is a different way of approaching the issue. It also changes the entire nature of the industrial development effort, because in many ways it takes civil servants out of the loop about deciding which company will get a grant and which will not, because it becomes the accountants who sign off on the company accounts to satisfy the Inland Revenue that they meet the qualifications for the corporation tax rate.

Q6 Ian Paisley: In terms, then, of strategically or tactically if it was there, should it be aimed to be lower than 12.5% and strategically lower than our nearest neighbour, so that it can boast of being the lowest tax regime in the whole of Europe?

Victor Hewitt: Well, I suppose one could envisage a situation where you had no corporation tax as a target. I think in practical terms, matching the Republic would be a very good start at least.

Eamonn Donaghy: I think it is important that when you look at FDI and look at the mindset of large organisations, they do not see corporation tax as income tax or as personal tax; it is a cost of business. So if you are a businessman and your organisation is aimed at trying to make profit, the reduction of corporation tax is seen as a means of reducing your costs. I know there are various arguments about the morality of tax, but in business it is a cost of business. So ultimately, business is going to want to locate where it is going to be least punitively attacked and the idea of having a low corporation tax is, I think, very attractive. The ultimate goal is always 0%, but I believe that a distinguishing factor of something like 12.5% would be a game changer. Going below that is feasible. I think under EU rules-we will probably come to that later on-you are going to have to weigh up the cost benefit; will you get a bigger benefit by going below 12.5% that is significant enough to cover the additional cost that would go with that? So yes, it is certainly something to be looked at, and I suspect that it is a very key factor in making that determination. If, for example, the Assembly were to have the power to make that decision, it is something that we would absolutely have to look at.

Chair: Mr Stride.

Q7 Mel Stride: Looking at the headline corporation tax rates, you obviously have a very large difference: 28%-which will be reducing, as you know, to 24% over the next four years-compared with 12.5%. Looking at the other taxes-one thinks of national insurance and the other taxes that are in the mix-could you just comment for us on what that gap looks like when taxes on labour and other areas are taken into account? Is it still as stark? Does it narrow or does it widen?

Victor Hewitt: Obviously in the Republic at the moment, given the rather severe measures that it has had to take in terms of employment taxes of one form or another, the overall tax burden will differ. Companies are concerned about corporation tax, and not merely what you would call the headline corporation tax rate; there are other concepts of corporation tax, such as an average effective corporation tax rate that takes into account allowances and various other mechanisms. Even when those are taken into account, the Irish rates are usually about half the UK rates.

Q8 Mel Stride: Could you give those figures? The average figures that you are talking about there?

Victor Hewitt: Yes, we can supply those. They are done by the Institute for Fiscal Studies; they produce these studies each year.

Chair: Naomi Long.

Q9 Naomi Long: I just wanted to talk a bit about 12.5% specifically. Some members have already asked about going lower than that. Can I ask you, would you see the transformation to 12.5% happening in one fell swoop or phased over a period of time?

Eamonn Donaghy: If I could come to your question in a slightly indirect way, I think that what large businesses are looking at is certainty. The introduction of a 12.5% rate, whether it happened immediately or whether it happened over, say, a phased period of two or three years, is probably not as important as knowing that that is going to be there for a long period of time. I think the commitment to a low rate of tax today, tomorrow and well into the future is what international business will want to see. So be it an immediate step change from the current rate down to 12.5%, or whether it is phased over a couple of years, it is probably not as important as saying, "We’re going to keep this." Again, that is envisaged by the Government in the Republic of Ireland, because they have clearly stated that they are not going to change the corporation tax rate and again, that is to provide an element of certainty to international business. So even if bringing it in over a couple of years was deemed by, for example, the Assembly to be the right way of dealing with this, I think that itself would be an interesting way of dealing with it, because large businesses do not just decide overnight that they are going to move to another country; it is going to take a period of time for them to set up and get started. If they knew that in 18 months’ time or in two years’ time or in two and a half years’ time that the rate of corporation tax would be 12.5%, that would be a much more important driver to them than it getting there as quickly as possible.

Q10 Naomi Long: You mentioned specifically that there would have to be a long-term commitment rather than a short-term one. Do you think it is something you could implement for a period of time and then review down the line, or do you think it needs to be a permanent change to 12.5%?

Victor Hewitt: I would imagine a minimum of 10 years. When a large company is going to make an investment, they have 10-year horizons at a minimum. You may review it as you go along, but unless you commit yourself to at least a decade, I really do not think that you will have the full effect of this.

Q11 Naomi Long: Okay. You have mentioned about foreign direct investment and particularly new business. Would you see this only applying to new business or would you see this applying to existing businesses as well? Would you be restricting it to particular sectors or would it be across the board?

Eamonn Donaghy: I think EU legislation is going to be a big driver in answering that question. It is not possible to introduce varying rates of tax across varying sectors, and it is not possible to distinguish between companies. I think that it would have to come in across the board. What we would envisage is it applying to trading profits derived by Northern Irelandbased companies. Obviously, getting into the detail of that and defining what that means will be a key part of the drafting of any legislation. I think that in order to comply with EU requirements, it is going to have to be across the board and apply to everybody. I think we could distinguish between trading profits and nontrading profits and, to be very clear, this is aimed at trying to attract companies that are going to create employment and trading activity, as opposed to being some form of tax haven in which nontrading profits can be sheltered. It is very much a focus on trying to create economic activity and therefore jobs in Northern Ireland.

Naomi Long: Okay, thank you.

Chair: Can we turn to skills training now? Mr Williamson.

Q12 Gavin Williamson: It has been said that a lower rate of corporation tax would need to be accompanied by measures such as skills training and investment in research and development to take of advantage of the expansion of the private sector. Where would the resources come from for the investment in things like skills? It is never cheap, is it?

Victor Hewitt: No, and we would not fool anyone that this is not coming with a price tag. It might be a substantial price tag, and no doubt you will want to explore that later. We are already on a trajectory where there are limitations on what can actually be offered to companies because of EU state aid rules. One of your subsequent witnesses will probably be able to give you chapter and verse on that, but the grant rate will be falling to 10% in some areas for large companies and might be extinguished as early as 2013. That will obviously leave the development agencies with nothing in the quiver. Some of the incentives are taken through the UK tax system, and I am thinking there of R and D tax credits, so that is not a direct cost to Northern Ireland at all, and we certainly envisage those continuing. We spend at least £100 million a year on direct grant aid at this moment in time, never mind what we are spending on the training side, so there is an effort going on in Northern Ireland to meet those other requirements. It is important not to forget the education system, which in the long term is of vital importance.

Q13 Gavin Williamson: So you would not imagine there being any extra money needed over what is already given.

Eamonn Donaghy: What I think might happen-again, this is taking a leaf out of what happened in the Republic of Ireland, or at least gaining from its experience-is the cart before the horse: do you do training first and then get the jobs or do you get the jobs and then do the training? I think unfortunately in the past we have done a lot of training but have not had the jobs, and the net effect is that Northern Ireland has managed to train some of the United Kingdom’s, Republic of Ireland’s and USA’s best businesspeople, because they had to move elsewhere. I think we need to try to match the training more closely to the jobs, so try to get an IT company or a pharma company and then try to gear the university education or the third-level education to try to match those skills to the jobs that are there. It is a difficult thing to get exactly right, but I would envisage that the training could be more targeted and focused. We need a better idea of the jobs that are going to come, as opposed to training people and hoping that in the future something will happen.

Chair: Okay. Mr Colvile?

Q14 Oliver Colvile: The skills base, though, is what is going to attract business and industry; they are not going to move to somewhere unless there are the people who can physically do the work and have the skills to do it. I should know something about this because in my constituency in Plymouth, I can tell you, we have similar issues as well. So how do you make sure that there is the skills base there? Do you think the universities have a significant role to play in helping regeneration and stuff like that as well?

Victor Hewitt: Absolutely. Universities are key generators of growth in the longer term. Many UK universities, however, are not that great at taking research and translating it into viable products at the end of the day. When companies come in, they in general will not be looking for highly specific skills, because they will do a lot of that training inhouse; it would be very proprietary. They are, however, looking for people with good basic skills and the system really needs to be geared to that. The more specific that you can be about the type of company that is coming in, the more you can tailor your training system to it. The Republic has become very good at that. It was able to move people over into various electronic engineering courses, because it knew the sort of companies that were coming. It pursued Intel for 10 years before finally capturing it and was able then to set up the necessary courses to support it. We have not had that focus. We have tended to take a huge spectrum of companies, because of the nature of our system, so it has been very difficult to plan a specific training regime around that.

Chair: Okay. We will move on to tax revenues.

Q15 Oliver Colvile: Yes. You have quoted research saying a 12.5% corporation tax in Northern Ireland would lead to this potential increased tax revenue of about £1 billion over 20 years. Frankly, most of that money will end up coming to the UK Exchequer. Have you had an opportunity in which to talk to the Executive and convince them that this is a good idea, despite the fact that the revenue might actually come to the UK Exchequer?

Eamonn Donaghy: I suppose, again, I will deal with this in a slightly obtuse way, but I will get to your point. I think there is an awful lot of discussion about the cost of doing this. The great focus here is, "This is going to be a cost, so under EU principles the Northern Ireland Executive, if they introduced a reduced rate of tax, are going to have to effectively pay for that in some way." I suppose last week the Northern Ireland Executive were suffering a significant amount of cost reduction in return for very little; the cost reduction is there because the money is not available. I think the focus here has to be on the cash flow required to make an investment. If Northern Ireland is going to do this and it is going to incur the cost, whatever that might be, then it has to see it as an investment; it is an investment in its future; it is an investment in foreign direct investment; it is an investment in new, long-term sustainable jobs. So that cost side of the equation I think should be looked at as an investment.

To answer your question specifically about the benefits to Northern Ireland, you are referring to the extra VAT, income tax and national insurance. Yes, that money at the minute would immediately go to the Treasury and ultimately would help to reduce the deficit that the Northern Ireland budget operates under. That could be seen as taking money out of Northern Ireland, but I do not actually see it that way. In return, what we will have is a significantly greater proportion of our population in well-paid, long-term, sustainable jobs. I think that is the upside for Northern Ireland. I think the social and economic implications of those are just enormous. So I think the focus is on that. If the Treasury also happens to win, then that can’t be a bad thing.

Chair: On the same point, Mr Williamson.

Q16 Gavin Williamson: I was just slightly curious. If George Osborne got up and announced that actually, he thinks that a 12.5% rate for Northern Ireland is a really good idea; in fact, he thinks it is such a fantastic idea he is going to introduce it for the rest of the UK-I must confess, I am not expecting this-what would be the economic benefits to Northern Ireland?

Victor Hewitt: Of doing it for the entire UK.

Gavin Williamson: Well, because obviously you would get 12.5% in Northern Ireland , as we would do in South Staffordshire .

Victor Hewitt: Well the reality is that because corporation tax is a significant part of the tax base in the UK, taking it down would cost a very large amount of lost revenue.

Q17 Gavin Williamson: I know that, but would the economic benefits still come to Northern Ireland by reducing corporation to 12.5% if it was the same in Wales, Scotland and England?

Eamonn Donaghy: Maybe an answer would be I think we would see a significant improvement in foreign direct investment. Again, Northern Ireland is in the unique position of having a land border with another EU country, so at the minute if somebody is looking to relocate, for example, a European headquarters somewhere in the British Isles and looks at the various possible locations, if they decide that the island of Ireland would be a suitable location, when you are comparing one with the other we are at a very significant disadvantage, because all of a sudden the cost of tax is significantly higher in Northern Ireland. If Mr Osborne was to decide to do that, it would be an interesting Budget, I would have to say, but at the same time I do still see that there would be benefits to Northern Ireland.

Chair: I think we are going to come on to the other parts of the United Kingdom in a few minutes. Can we move on? David Simpson.

Q18 David Simpson: Thank you, Chair. I suppose there is nobody round this table who would not want lower taxation, especially those who are involved in companies or whatever. However, the cynics-I am not saying I am one of them-would say that the biggest beneficiaries of this will be utilities and the banks. I want you to answer that one in a minute or two. You have also said in your report that many countries have followed the Republic of Ireland’s model of lower taxation. I would like to hear some example of countries that have done that. Also, have you any statistics on how many companies have located in the Republic of Ireland since it lowered its corporation tax and what types of jobs were brought to the Republic? I am not talking about brass plating; I am talking about actual companies. Probably other members will come on to that eventually, but that is a big issue and a bone of contention among the business community, where they can see an inequality if that were to happen.

Victor Hewitt: I will deal with the windfall gains point, which I think was your first. It is certainly true that if this has to be applied to all firms, including existing firms, there will be people who will make windfall gains, because they will have done nothing other than their normal business but suddenly they will not be paying as much corporation tax and therefore there will be a windfall gain. It may be the case that we would want to look at some mechanisms for trying to claw some of that back, because it is not really part of the policy; it is a by-product of the policy, but it is not an actual part of the policy.

Q19 David Simpson: Can I just interrupt, Chair? In relation to clawing it back from the utilities or the banks or whatever with some form of legislation, what we have seen in the past, Mr Hewitt, is that the Government, whether it is Labour or the new coalition, have no powers over the banks. So how would you see that in your opinion, as an economist?

Victor Hewitt: Well there are ways of doing this that are within the competence of the Executive. I do not want to go too much into specifics, but you do have control over the business rates, for example, which all businesses pay. That is a very blunt instrument and one would need to be careful about things like small companies, for which this is not a particularly attractive policy, because they are normally not paying corporation tax and you would not want to penalise them in order to get some people who are otherwise gaining. With imagination, many of these things can be tackled. You might decide that the overall benefit of the thing is worth suffering the pain of the windfall gains at this moment in time.

Q20 David Simpson: What about companies within-Eamonn, do you have an idea?

Eamonn Donaghy: I think it is very obvious that if you reduce the corporation tax in one part of the country, there is going to be potential for certain organisations to look at exploiting that. It is brass plating or it is transfer pricing, and that is exactly what we do not want to happen. What we are looking to try to do is to form a basis on which economic regeneration can take place and economic prosperity can be brought to Northern Ireland. We made some suggestions, and the UK tax legislation contains quite a lot of the weapons that are needed to prevent this. There is already transfer pricing legislation that would stop a company based in England setting up a branch in Northern Ireland and pushing all its profits into Northern Ireland. The brass plating, which is the concept of creating a dormant company in Northern Ireland and saying that it exists there and is making all its profits, again is another potential loophole.

What we recommended was the concept of those companies wishing to claim this relief having to do a little bit of extra homework to prove their substance in Northern Ireland-for example, a requirement to identify the number of people that they employ in Northern Ireland. So to use the rather blunt but fairly useful instrument of saying that if they employ 100 people in Northern Ireland out of a total work force of maybe 100,000, and yet try to say that 50% of their profits are arising in Northern Ireland, that they will incur an inquiry from the Inland Revenue as to why that is the case.

So I think avoidance is always an issue. Antiavoidance legislation is the answer. A lot of the legislation that we would need already exists. I think appropriate additional legislation can be introduced, and the selfpolicing mechanism of having additional reporting requirements-only for those companies that wish to claim it, so we are not adding red tape to anybody that does not want to claim this-is a means of trying to police this concept of getting something for nothing.

Q21 David Simpson: What about the examples of countries that have lowered-

Victor Hewitt: There are such countries in eastern Europe, such as Estonia and Finland. They are not directly comparable. One of the advantages one has in both Ireland and in Northern Ireland, if lower corporation tax came in, is that they are English speaking. That is a big boon for some of the multinational companies. In terms of financial services, they also sit in the right time zone because they can bridge the activity across the Atlantic with the activity in the far east and they can more or less do that round the clock, which is one of the reasons we have a large financial services sector in London, of course. It is not just a matter of tax. You have to have some of the other basics there. In many of these countries, the basics are not quite in place to be attractive to multinationals to the same degree.

David Simpson: Thank you.

Chair: Will you press the other two, David?

Q22 David Simpson: Yes. In relation to companies that have set up or established in the Republic of Ireland since the corporation tax was lowered, have you any indications of what sort of companies or how many extra were employed over that period of time to see the advantages in the south of Ireland?

Victor Hewitt: In the south of Ireland, you have virtually every company in the Forbes 500 making an appearance. It is particularly attractive to things like electronics companies and pharmaceutical companies-companies which have very high valueadded. Northern Ireland has none of those at all, so it is a really significantly different environment. I think we should note that were it not for the FDI in the Republic at this moment in time, the country would be in very severe difficulties, because it is the FDI through its exports that is keeping the Irish economy afloat.

Eamonn Donaghy: If it is any help, the Irish Development Agency has published, in the past couple of months, the companies that have continued to invest in the Republic of Ireland, with a list of companies up to the end of July that have come in, be it in the financial services sector, the technology sector, the IT sector or the pharma sector. Each one brings 200 to 300 jobs, and there is a total of 4,000 jobs in over 50 different projects, either new or existing investments. I think the Republic has tried to create economic clusters. It is difficult for a small country to be all things to all people, so therefore the idea of going after technology companies or after pharma companies is where the IDA seems to have focused, and to build together this idea of a cluster-the Silicon Valley concept-because that is where economic activity happens best. So the situation is a lot more focused and the Republic has specialist teams that go beyond just tax-it has people who understand the business language of that industry and its needs. The issue goes back to the training-it can focus universities and give them an idea. In fact, in the Republic of Ireland, the universities are all very clued into what the IDA is doing, so that they target the market for which they need to educate people. So we can share this list with you and I can provide this to the Chairman.

David Simpson: Thank you.

Chair: Thank you. Mr Paisley.

Q23 Ian Paisley: This is just a followon. Have you had any research or are you aware of any research that indicates that companies currently working in financial services here in the City of London, Geneva or other financial centres would move their entire operation an hour from London to the lowest tax regime in Europe, if it were in place?

Victor Hewitt: I smile slightly because Sir David Varney raised the issue when he was doing his report, and I tried to reassure him that he would not wake up one morning and find that Canary Wharf had been towed away to Belfast. Companies like that like to be in the same environment; they are almost perfect clustering companies. I do not see that Northern Ireland would steal away a vast quantity of that investment. Ironically, it might well steal away quite a substantial amount of the investment in the International Financial Services Centre in Dublin. That is because the wage levels in Dublin are extremely out of line with the economy. So if it was a matter of moving a few miles up the road-

Ian Paisley: They would welcome that, wouldn’t they?

Victor Hewitt: Yes, well it is an interesting idea, but we are not seeking to do anyone down in any of this.

Chair: Okay, we have covered brass plating to an extent, but Mr Lopresti, do you want to just press it further?

Q24 Jack Lopresti: Yes, I want to mention a couple of things. Has the number of brass plating companies significantly increased since the Republic lowered its corporation tax and are there other aspects of the tax regime in Ireland, apart from low corporation tax, that may have attracted foreign companies?

Eamonn Donaghy: As I said earlier, as with all tax incentives there are those that wish to exploit them in a way that they are not meant to be exploited. There have been cases of brass plating taking place in the Republic of Ireland. I think the Republic of Ireland has looked at that. Again, it is a signedup member of the OECD and it has actively tried to comply with OECD requirements; it has recently brought in transfer pricing legislation, and it actively dissuades the setting up of brass plate companies.

What they have been able to attract is organisations that have developed, for example, intellectual property, so they will have an R and D facility and will attract IP, so that they will benefit going forward from the lower rate of corporation tax, but as a result of having creating the IP in that jurisdiction. So there is a long-term benefit to the Irish system by having a long tail on the rewards arising from the R and D activity that is taking place. That also then provides the funds and the encouragement for those companies to continue carrying out those R and D activities. That involves the use of high-skilled, well-paid individuals; the number of PhD students that are now coming into industry in Ireland has increased significantly. Again, its focus has been on going for that high-end, high-value type of job. Absolutely there will be brass plating that still happens, but it is actively dissuaded. Certainly, that is why I would be very supportive of what you could euphemistically call the "bums-on-seats test" to try to prevent companies coming in to just piggyback off what is a low corporation tax rate. That is not what we are looking to try to achieve here.

Chair: Mr Williamson.

Q25 Gavin Williamson: A few years ago, you often used to hear references to the Celtic Tiger. It is probably not quite as often referred to as that now, but how much was that inward investment driven by the fact that the Irish economy was doing very well-obviously, a lot of it was property related-and how much of that growth was the decrease in corporation tax? Again, the question is a little bit cart or horse, but you are obviously a lot closer to it than me.

Victor Hewitt: I do not think that very many American multinational companies were setting up in Ireland in order to service the Irish market, because it is simply not big enough. They were using it essentially as an export platform into Europe and for their activities around the world. After all, about 60% of world trade simply goes through multinational companies. It is not country to country; it is company to company, or intracompany, even. The true Celtic Tiger phase lasted roughly about seven years in the 1990s. That was very much an exportdriven model, and very successful it was too; it was growing at 7% or so per year. From about 2000 onwards, the focus began to change. The drivers of the economy were both personal consumption and, more particularly, property development. Then we had the property bubble and that then disintegrated with the downturn in the market and they obviously then found themselves in very great difficulties. As I said before, it still has a backbone of FDI companies that are effectively maintaining their export markets; perhaps 90% of Irish exports are coming from foreign direct investment companies.

Eamonn Donaghy: Again, that is backed up by statistics. I think the Celtic Tiger probably got slightly smaller and was hidden by the very large drive towards investment in property and nontrading activities. It is still alive; it is still there. There is still inward investment in the Republic of Ireland; there are still lots of multinational pharma companies, and IT companies that are based in Ireland and that are staying in Ireland. As a result of that, I think that the model they had of reducing corporation tax to attract that type of investment and to retain that type of investment is still very vibrant. I just think the crash and burn story of the last couple of years has been spectacular. The introduction of NAMA and the debt crisis has not been a result of the failure of the Celtic Tiger, but I think it has been a result of the overreliance and the overspending and overconsumption that took place in Ireland, for which it is now paying a dear price.

Victor Hewitt: I do not think we should entirely lose perspective here. GDP per head in Ireland is still significantly bigger than in the UK. It is still the second most prosperous country in Europe, even after the effects of the crash. This has had a really significant changing effect on the Irish economy. I can remember the Irish economy in the 1950s and 1960s when its principal export was live cattle. Now, it has moved vastly away from that, overtook the UK in the early 2000s and is well up the European league. So it has had a lasting effect.

Chair: Okay, if we can possibly move on to the constitutional side of it now. The question arises whether, if the decision was taken to lower corporation tax, it could be done from Westminster or the competence would have to be given to the Assembly. We will want to talk to the European Commission about this, but we would value your views on it as well. Mr Stride.

Q26 Mel Stride: Yes. Let us assume we have taken the decision that we want to change tax rates down to 12.5%. We obviously then run into EU legislation, specifically the Azores judgment in terms of Northern Ireland having the autonomy to take those decisions, no subsidy coming in to back it up and so on. What do you see as the administrative and legislative steps that we would need to then go through in order to enable Northern Ireland to make those changes?

Eamonn Donaghy: Obviously the Azores judgment is less than 10 years old now. The requirement that a region can have a different corporation tax rate was the key to that, but it came with certain preconditions. The requirements for the region to have the autonomy to make that decision themselves and to pay for it themselves are obviously the key factors that apply. So, as a result, I do not think, with greatest respect, this Committee can decide to change the rate of corporation tax in Northern Ireland; nor in fact can the Westminster Government or the Houses of Parliament change the rate of corporation tax in Northern Ireland by itself.

To comply with the EU legislation, what I would envisage is that the Northern Ireland Act would have to be amended to effectively remove the certain element of the excepted matters that currently exist. Taxation is entirely an excepted matter, so there would need to be a variation to the Northern Ireland Act to effectively give the Assembly the ability to vary the corporation tax rate. Then it would be up to the Assembly to decide whether to use that power, which it could devolve to itself, and by how much it would vary the rate, what the cost of that would be and how it would effectively look at financing that cost.

So I think that there are a couple of steps here. One is that yes, absolutely, Westminster would have to make the decision to give the Northern Ireland Assembly tax-varying powers and I think that would be by means of a variation in the Northern Ireland Act, but I am sure that is for the legislators to determine. The second step, having crossed that bridge, is for the Assembly then to take that autonomous decision, because it has the power to do so, and of course then bear the cash flow implications of that.

Victor Hewitt: I suppose there are issues about whether it would be the power to vary the rates that would be transferred, or whether one would need to transfer the entire corporation tax regime to the control of the Assembly. The second would be a much more extreme operation. It would still be doable; after all, the social security system was transferred to Northern Ireland but mirrors exactly what happens in the UK system. So there are means of dealing with that. A lot of this comes down to the interpretations that are put on the judgment. The Commission is bound by the judgment as much as the member state. The Commission does not arbitrarily change this. In extremis, they would take another case to the Court, but we do not see that as being a feasible thing at this moment in time. It is important, however, to have contact with the Commission to ascertain its views as to the best way of taking this forward to cause them the least of headaches.

Q27 Mel Stride: If it were the case that autonomy for tax matters were transferred in its entirety-the broader scope that you have just referred to-would there be any other tax incentives that you would then be thinking would be worth exploring or thinking about? Particularly those that might not even have the problems of subsidy through the block grant, for example.

Victor Hewitt: We have no such plans at this moment in time. Obviously there are other potential taxes that could be transferred. We all remember, of course, that Scotland has long had power to vary income tax by 3p in the pound, but it has never found it convenient to actually use that power, as I understand it. I do not think there is any enormous appetite for taking a wider range of tax powers into the Executive, but I cannot speak for the Executive.

Eamonn Donaghy: We see this as a focused way of trying to enhance the economic stimulus that Northern Ireland requires. It is not a grab for fiscal legislation. I think that if, for EU legislative purposes, Northern Ireland had to do something slightly more draconian than just have the power to vary the rate of corporation tax, then that obviously would have to be looked at. However, I would have thought that certainly the idea of having power over all corporation tax or, indeed, wider taxation, is a much bigger issue than something that we are bringing to this table. This is very much focused on trying to create economic stimulus and to attract inward investment, so I would certainly be very keen to try to keep that focus as narrow as possible, rather than opening up to a wider debate on fiscal autonomy.

Q28 Mel Stride: One final aspect of this, which is unlikely to happen and hopefully will not happen, is that of course there is a possibility we do this and then have to revert to direct rule for some reason. Do you have any comments on how you would expect that to be taken into account in the legislative aspect that we need to go through?

Victor Hewitt: That would be a very difficult situation, because obviously part of the Azores judgment is that there has to be an autonomous administration, and if direct rule is reimposed, then there would not effectively be one. One might be able to get a derogation from the Commission, but that is unexplored territory at this moment in time.

Eamonn Donaghy: I think that would be for EU lawyers to pore over. I would have thought that if the Northern Ireland Assembly had made an autonomous decision, if for whatever reason if the Assembly had to be suspended,, you would have a strong case to say to the EU that this was the will of the Northern Ireland people, but I stray into areas that I am probably not qualified to discuss.

Q29 Chair: Well, as I have said, we will speak to the Commission about this. Has there been any work carried out into whether a derogation would be possible now, to do it from Westminster, given the background of Northern Ireland? It is an exceptional case in many ways, because of the Troubles. Has any work gone into that prior to this debate?

Victor Hewitt: No, I do not think anyone has taken the presumption that the current arrangements will fail. We all trust that they will not at this moment in time.

Eamonn Donaghy: I think we did consider the ability for a derogation and I think the EU legislation does provide for such derogation. Again, this is a really different tack to take on the presumption that there will be a failure. I think the preferred route, certainly following the Azores judgment, would be that the people of Northern Ireland, through the Assembly, make this decision as a conscious decision, as opposed to something that is not taken by the people. So I think that the derogation case could be quite a difficult one to make and may not attract a huge amount of sympathy from the EU.

Victor Hewitt: The old Biblical saying is, "Sufficient unto the day is the evil thereof." We hope to avoid any of that.

Chair: Okay. We will move on to the Scotland and Wales aspect to this as well. Mr Benton.

Q30 Mr Joe Benton: Afternoon. Just before I pose my question, I want to follow up quickly on what was said before when you were discussing the Celtic Tiger. Forgive me if it is included anywhere, but I wondered about the 12.5% that prevails in Southern Ireland; do you have any idea what that was reduced from? It should be possible, in retrospect, to calculate the extent that the reduction from whatever it was to 12.5% influenced the Celtic Tiger. If you have any information on that, I would appreciate it.

Coming back to the fundamental question I wanted to ask-you partially referred to it in answer to Mr Williamson before-I wanted to put it to you that to deliberate on this, any Government would have a huge political problem about differential rates of tax throughout the UK. I suppose it would be quite justifiable; if a reduction of any sort were granted in Northern Ireland, quite rightly in my opinion, you would get other depressed areas, not to mention the devolved Scottish Parliament and the devolved Welsh Assembly, saying, "We have trouble spots too; we have depressed areas." Even in the area that I represent, Merseyside, we know what depression is about, too. So with full justification, they would be saying, "Look, you have made this concession to Northern Ireland. Where do we fit in? Can it not equally apply?"

Now, that creates a terrible political problem that I am sure you appreciate, and all the financial consequences would have to come into the reckoning and be part of the decision. So I want to ask you about your observations and views. First, what are the special circumstances that would justify preferential treatment alone to Northern Ireland? Secondly, in your opinion would it be a legitimate thing for other devolved parliaments and depressed areas, such as Merseyside and the north-east, to make the same request and have it applicable there? The other point I just wanted to ask you about-it is difficult to put this to you-is that the move from congested GB regions would release resources that would be taken by other firms. So are we talking about pure new investment? I know this was referred to before, but I think this is an important point. If the result of reducing the corporation tax only means that firms are going to transfer from one area of the country to a more attractive rate, I do not see how, in the end, that is going to be of benefit to the UK.

Victor Hewitt: We will divide the questions between us, if we may.

Chair: Do you want to take the UK question first?

Victor Hewitt: If I might take the Irish experience one and maybe the last one about displacement and you maybe deal with the Scotland and Wales issue. On the Irish experience, low corporation tax in Ireland actually goes back to the 1950s, where it was applied only to manufacturing at 10%. The manufacturing base at that time was extremely thin in Ireland and took time to build up. What happened thereafter was that the European Commission took the view that you could not really have a corporation tax rate applying to only one industry or one sector and that something would have to be done about that, because the rates in the other sectors were as high as 40% at various times. So what the Irish did was to compromise and to bring their common rate down to 12.5% across all sectors. Now, obviously it faced the windfall gains and the tax loss issues, but there was in fact no actual loss of corporation tax in the Republic, because of the inflow that it managed to drive. So the history is a bit chequered, but the basic thrust is that lowering corporation tax for everyone actually benefited everyone in the Republic.

If I might just touch on your last question about what economists would call displacement, where all you are doing is moving activity around the country, of course to some degree that is regional policy. It has always been an element of regional policy. As I was speaking to Eamonn earlier today about the situation immediately after the war, when there was a system called industrial development certificates, where you had to get a licence to build a factory in south-east England. Very few of those licences were issued in the south-east but quite a lot were issued in the north of England in order to encourage firms to move out of the south-east and into the north. That administrative system has broken down, but there is always probably going to be an element of displacement. One of the benefits potentially for the south-east is that it opens up opportunities for new firms to move into that space that is created, so there is a net overall gain in the economy. However, we are not really attempting to massively displace activity from England or other areas to Northern Ireland. The other thing to remember is the scale. Northern Ireland is not very big. It does not require very many new factories to open to make a significant dent in the unemployment rates in Northern Ireland. A job creation rate of 3,000 to 5,000 a year would significantly improve our position. I will hand over to Eamonn to talk about Scotland.

Eamonn Donaghy: Yes. Just on the displacement issue as well, I think that for 20 or 25 years there has been a much lower rate of corporation tax in the Republic of Ireland. It is an English-speaking jurisdiction with a similar legislative administration, and while there has been some displacement from GB and the UK to the Republic of Ireland, there has not been a significant amount of that. The Irish sea tends to be a little bit of a prohibiting factor in terms of displacement. So we do not believe that there will be a significant amount of displacement. There might be an attempt at brass plating, which we have discussed already, but in terms of real economic activity and real movement, if a company is prepared to move from say the north-east England or south-east England to Ireland, they would also be prepared to move elsewhere; they would also be prepared to move to countries such as Singapore, Estonia and Lithuania. So I think displacement has to be looked at in the fact that if that company was going to go anyway, it would be better for it to stay in some part of the United Kingdom than to leave the UK altogether.

In relation to the point about Scotland and Wales, we are here to represent the case for Northern Ireland. We have no objection to Scotland and Wales looking at this; in fact, be it Merseyside or be it Plymouth, I am sure that cases could be made. I think the EU legislation and case law indicates that it has to be an autonomous region; you have to have the autonomy to make that decision, which the likes of Merseyside, Plymouth and England do not have. Wales and Scotland do have that autonomy.

The second thing is then the cost that is associated with that. Looking at the cost, I think the Northern Ireland base is so low that the cost of doing this is actually going to be comparatively low. If you take Scotland, the corporation tax base is much, much higher, so the cost of Scotland looking to do this would be significantly greater than it would be for Northern Ireland. I suspect that Wales might be similar, but we do not have the statistics. Certainly, it is possible for Wales and Scotland to ask for this; we have no objection to their doing so, but they would obviously have to comply with EU legislation, and we suspect that cost would be a very prohibitive factor.

Chair: Okay. There is very little time left, but Mr Colvile.

Q31 Oliver Colvile: Can I just ask one question of you? The corporation tax story that we have been talking about is one part of it. What other things do you think would be an attractive package to offer business to come, so that Northern Ireland could become very competitive with Southern Ireland as well?

Eamonn Donaghy: I think we already have an awful lot of the basic requirements that are needed to attract FDI. We have been successful in attracting jobs in the past; unfortunately, they are at the cost mitigation side of the equation as opposed to the proper generation side. We have a good, well-educated work force. Yes, education could be more targeted. We have a reasonably good infrastructure; we have a good IT infrastructure; we have a good administrative system; we have a good legal system; we are in the right time zone to bridge the world. So there are a lot of good things that are going for us. Of course, there are additional matters that could be brought into place; for example, I know planning is constantly a bane, but that is something that the Assembly is looking to improve on. One other issue is that we would like to talk about the idea of maybe bringing specialist skills into, for example, the Assembly or the Executive as a means of trying to help the Assembly to move into a different plane of economic growth.

Victor Hewitt: Yes, we were thinking about the enterprise zone idea and one relatively low-cost way of putting something into that package would be to enable Northern Ireland to access levels of knowledge and expertise that it may not at this moment have. There is an example in the form of the Strategic Investment Board, which brought expertise in to help the Executive to drive forward PPPs and PFI. Possibly that model might be adopted for other types of expertise, where business people could lend their assistance to the Executive in terms of framing its policies at relatively low cost.

Chair: Okay. Well, you have been our first witnesses in our first inquiry, so can I thank you very, very much on behalf of the Committee for coming and for everything you have contributed. Thank you very much.

Examination of Witnesses

Witness: Jeremy Fitch, Managing Director, Clients Group & Business International, Invest Northern Ireland, gave evidence.

Q32 Chair: Welcome to the Committee. I think you heard all of that evidence?

Jeremy Fitch: I have, thank you very much. Yes.

Chair: You heard my introduction then, saying how important this issue is, so you are very welcome and we are very pleased that you were able to join us today. I wonder if you could perhaps introduce yourself and maybe briefly explain the role of Invest Northern Ireland?

Jeremy Fitch: Okay. Invest Northern Ireland is a nondepartmental public body. It is sponsored by the Department of Enterprise, Trade and Investment and it is responsible for the support, development and growth of the Northern Ireland economy, really through three channels. One is to take the existing businesses in Northern Ireland, whether they are indigenous or externally owned, and encourage them to become more competitive through research and development, through training or through capital and employment assistance. In addition to that, we will encourage a spirit of entrepreneurship in Northern Ireland by encouraging local new starts, specifically those that are focused on markets outside of Northern Ireland. Thirdly, Invest Northern Ireland has a responsibility for attracting new inward investment into Northern Ireland. My specific role and my area of expertise is in inward investment. My role is Managing Director of Business International and the Clients Group, so it is both attracting new first time investment into Northern Ireland and then the Clients Group encompasses the existing clients that are already located in Northern Ireland; developing relationships with them and encouraging then to invest further.

Q33 Chair: Thank you. In terms of your work then, you perhaps could explain to what degree you get frustrated by the fact that the corporation tax is so much lower in the South. What effect does that have on the decision making of companies who might want to come to the island of Ireland? I know you cannot put numbers on it, but can you give us some idea of the extent of the problem?

Jeremy Fitch: Okay. Yes, I look enviously to what the Republic of Ireland has on the corporation tax side. If I am being asked whether it would make a significant difference: definitely; absolutely it would make a significant difference to promoting Northern Ireland as an investment location. The reason that I say that is that it immediately allows us to target a larger market. At the moment, the market that we target for inward investment is constrained. If you think about it, we will target those particular companies where we believe we have a competitive advantage. If a company is looking to make profits and to have a low tax, then we are less competitive than the Republic of Ireland, so our market is immediately reduced. Having a lower corporation tax will allow us to broaden our market and it will give us a more attractive hook to bring those companies to Northern Ireland. So it immediately makes the target market that we are pursuing a lot bigger. Now, the evidence that you can see in that is that in the last five years, in relation to jobs, the Republic of Ireland has an 85% market share compared with our 15% market share of inward investment. It has been aggressive in the way that it has been defending its position and letting companies know that it will be keeping 12.5% corporation tax, despite the economic difficulties that it faces. It was made absolutely apparent last week, when we had the US Northern Ireland Investment Conference hosted by Secretary of State Hilary Clinton, where in the breakout group that I attended, the question was asked about tax. The conclusion was simple-tax matters, period.

As an anecdote, when I first joined the economic development world, I was told of a story where we were at a particular conference and Northern Ireland had a very professional looking stand; they had done a really good job on it. Next to us was the Republic of Ireland, which did not look quite as smart as ours, but someone had pinned up in handwriting-and at that stage it was 10% corporation tax-"Corporation Tax 10%". That is where all the interest was; there was a big queue at that one. So we have always looked enviously, Mr Chairman, at what they have. Someone once said, "The Republic has a tax advantage, and we have the Troubles". Now, that was a few years ago and maybe we will address that particular issue at some point during the questions, but yes, it is something that I would definitely say would make a difference.

Q34 Chair: When you talk about your target audience or your target market, can you say a little bit more about that? How does that then break down? I understand the point that if they are looking for lower tax, then they are going to go south, but how does that influence which countries or which companies you target for inward investment?

Jeremy Fitch: Okay. Well ultimately anyone in a sales role has to put themselves into the mind of the customer: what is the customer looking for? We focus very specifically on target markets. Now, most inward investment is driven by a desire to increase sales or to service customers. On this particular issue, because Northern Ireland has a small indigenous market, we are disadvantaged in that. If you are looking to companies who are going to service Europe, we are relatively peripheral to the rest of Europe, so that is another disadvantage. Another reason for inward investment is through joint ventures or mergers. Now, we have quite a small private sector in Northern Ireland, so again, there is quite a small market for that.

So we have tried to look at, "What are we good at? Where do we have a competitive advantage and where can we win those projects?" It falls down to three or four criteria. Bottom line, the key resource that we have is our people-a talented, welleducated and available work force. Consistently, inward investors to Northern Ireland cite that as the primary reason why they came to Northern Ireland. The other ways that we will focus our market-I mentioned this to some of you before at Hillsborough-is what we call our six Cs. They are, first of all, where are we culturally compatible? The previous witnesses talked about being English speaking or having a time zone overlap-cultural compatibility. Basically what businesses are looking for is: "Where is it easy to do business? Where will that save me costs? Where is it less complex? Where can I be slicker?" So we are talking about being culturally compatible, being close to customer, being a nearshore solution to western Europe and being cost competitive.

Maybe an example is the best way of illustrating this. I think it is the example I used at Hillsborough as well, so forgive me for using it again. In 2001, an Indian business process outsourcing company called HCL bought a BT contact centre in Belfast. At that time, the BT contact centre employed about 375 people. If we were being honest with ourselves, we thought all those jobs were going to go east; they were going to go to India to a contact centre. How could we compete? Today, HCL has two sites in Northern Ireland and employs more than 1,000 people-the figure has risen to 1,400 at some stages, but it fluctuates. We had a good look at why this happened. The reason was that Indian companies no longer wanted just to be Indian companies; they wanted to be global. So they needed to be near to their customers in western Europe; they needed to have a cost competitive base in western Europe and Northern Ireland was a good place to do it. Then the cultural compatibility issue was also cultural compatibility with those nearshore customers. The cultural compatibility is a very strong reason, particularly with North American clients.

What happens then, Chair, is we segment the market and ask where those criteria fit well. They fit well in a number of specific sectors: ICT and software development, financial services and business services are the three that we would target specifically in our overseas markets. Those three sectors would account for about 80% of the new jobs that we have secured in the past eight years.

Chair: Thank you. Turning to jobs, I call Mr Colvile.

Q35 Oliver Colvile: The Independent Review of Economic Policy in Northern Ireland identified concerns around attracting highvalue employment. How successful have you been, and can you estimate the difference a lower corporation tax would make?

Jeremy Fitch: On the issue of higher-value jobs, the period that the independent review covered was prior to our current corporate plan. Our current corporate plan has a specific target to look at higher-value jobs. Previously, there was not a target like that, so in a sense we thought it was a little bit unfair that they criticised us; our target was to get jobs. Everybody said, "Well now we need to look at productivity," and prior to the downturn, productivity became the major issue. So we are focused on that and our target is to try to get about 5,500 new jobs above the private sector median in this three-year period, which is 17% higher than what we did in the previous three-year period. I hope that we will be able to achieve that target by the end of March this year.

Q36 Oliver Colvile: Do you think that the Troubles have actually had an impact on what has been going on?

Jeremy Fitch: In Northern Ireland.

Oliver Colvile: Yes.

Jeremy Fitch: In attracting inward investment it has, but it depends on whom you are talking to. If you are talking to an inward investor who has been in Northern Ireland for a long time, it is less of an issue. If you are talking to someone who knows of Northern Ireland but has never been, it is an issue. Remember that a lot of businesses, if you are putting yourself into the mind of the customer and the investor, want to minimise risk. Even if there is a perceived risk, very often what happens is a lot of companies will employ location consultants and Northern Ireland will rarely get on the shortlist because we are not deemed to be an attractive location for consultants to put on the list.

I will give you an example. There is an old adage; people say, "No one ever got fired for buying IBM." Northern Ireland is not IBM in this scenario. What we find is that if I was to bring a potential investor into Northern Ireland and show them around, usually it is someone at project manager or project director level. Their job is to go out, do all the research and find out what is the best location. They will go back to their board and make a recommendation. You also have to put yourself in that particular individual’s shoes; their career is at stake on the recommendation that they make. If there is a risk in the back of their mind that Northern Ireland is not the best location, then, if it is a close call, we will get relegated to second. As someone has said, there are no silver medals in inward investment. So we have to make sure that we give that particular individual the cover, so we have to make sure that we get their chairman or their chief executive to visit Northern Ireland as well. That is the way that we do it. We simply encourage them to come and have a look, talk to the existing investors who are already here, and we find that it generally works. However, it is hard to get them here in the first place. So yes, it has made a difference.

Q37 Chair: On that point, has there been any change recently? Has it got harder or easier recently?

Jeremy Fitch: I grew up in Belfast. I love Northern Ireland and I love the job that I do and certainly the environment that my children are growing up in compared with what I grew up in, it is like a big dark cloud has lifted. I think everybody in Northern Ireland appreciates that and sees that, and they do not want to go back. We have also been fortunate that there has been economic growth over the past 10 or 12 years as well, which has been encouraging. So I think a lot of people see that. The support that we have had from the US administration on this particular issue as well has been absolutely fantastic. To have support from the Secretary of State, Hillary Clinton, and we are the only country in the world that has a special US economic envoy in Declan Kelly. To have that conference last week makes an absolute difference to us. The reason that they are interested in supporting us is because they see Northern Ireland’s political story as a success story. They are interested in peace around the world and they want to show that as an example around the world. So inward investment is important to cementing that particular process.

Q38 Oliver Colvile: Obviously here, and most certainly in my patch, we have had real difficulty in getting the banks to lend to the small businesses. Is that the same problem as well in Northern Ireland? Have you had real difficulty getting the banks to actually-

Jeremy Fitch: I do not have statistics right across the board, but anecdotally, I am aware of some companies experiencing difficulties. I think the difficulties that are experienced in Northern Ireland are similar to the rest of the United Kingdom. We are aware, when we are tracking the grant claims that come in; there has been slippage in particular grant claims being made because those investment programmes have not been able to be implemented because the bank funding has not been secured.

Chair: Ian Paisley.

Q39 Ian Paisley: Your evidence suggested that the tax could help create something like 64,000 new jobs over 20 years. The organisation we have just heard from estimated that growth to be nearer 90,000 and we have seen other suggestions that it could be more than 100,000. Some 64,000 jobs would equate to where we are at the moment; about 3,000 to 3,500 jobs every year for the next 20 years. So where is the real bounce on this, Jeremy? Where are we going to get the significant growth? You and I have knocked some interesting doors in the past. I remember being in Donald Trump’s office with you one day. It would have been nice to be able to say, "We have the lowest tax rate in Europe." Would this have made the difference? Do you see companies operating in the Republic of Ireland today that you know in your heart of hearts could actually have been in Ulster?

Jeremy Fitch: Absolutely. As I said at the start, the target market that we can go after is reduced because we are not competitive in that particular area of tax. If companies are looking for that, we cannot compete. In relation to the estimates of the benefit, it is difficult to predict with any certainty the practical impact that 12.5% will have. You can see that in the different estimates. The 3,200 that we have put into our paper is additional to what we are already doing. It fluctuates a little bit, probably between 2,500 and 4,000 on an annual basis. So we are saying that the 3,200 is additional to what we are already doing. Now, I must say that the Economic Reform Group’s model is a lot more sophisticated than our own, but all that we did was just to try to get a flavour of the rough size of this. All we did was we took all of the investment into Ireland and simply prorated it on a population basis and that would be the additional amount that we would get.

If I could, I have jotted down some points of where we are different. So the Economic Reform Group correctly excludes acquisitions and mergers, because if it is just a pure takeover, then there is no net economic benefit; it is just a change of ownership. As does ours; ours excludes that. The Economic Reform Group one correctly excludes activities focusing on local markets, as does ours. So basically retailers coming in and doing that; we have not included that. Economic Reform Group excludes reinvestment by existing companies; ours does not. Now, theirs is more accurate than ours on that basis, so in a sense, our 3,200 for that one could be overstated. What we are saying there is that the South already has a very strong cadre of existing investors; stronger probably than what we have. So we are assuming that we would get an equal amount; that is probably not the case. Ours assumes similar economies. So it could overstate by not accounting for firms that are going into Ireland specifically because they want to be in the eurozone or seeking to locate in a capital city of a sovereign state. So there are a number of assumptions and a number of differences there, but it is a broad brush; we are trying to get some sort of feel of what the difference would be.

Chair: Naomi Long.

Q40 Naomi Long: I want to ask a couple of things. You mentioned the issue of the Eurozone. In terms of the companies that you would be pursuing for FDI in Northern Ireland, how much of an issue is the eurozone for them when you are dealing with them about potentially coming to Northern Ireland? To what extent do they look at the island of Ireland, if you like, as a whole, and then see the differential rate in corporation tax as a disincentive for Northern Ireland, having already in their mind made the decision that in terms of the profile of the work force and all of those other things that the island is the right place, but Northern Ireland then gets excluded almost at the last hurdle? To what degree is that an issue?

Jeremy Fitch: Okay. I will take the eurozone question first. Largely people are aware that when they are looking at Northern Ireland, they are looking at sterling, so it has not been a major issue. Because of the way that we target our markets, we are effectively targeting cost centres rather than profit centres; so functions that can be established and it is just the cost that is allocated. So the issue that arises with the eurozone is just if the exchange rates change. Now generally it will just be between sterling and say the dollar; that is probably more of an issue. If the eurozone changes between the dollar, it is trying to say comparatively how much more or less competitive do we become as a result of those exchange rate fluctuations? So even if we move to the eurozone, then there would be an immediate counter: "How does Northern Ireland compare with other currencies as well?" if you are looking at the US market.

With regard to the tax rate, they get there at the last hurdle and there are varying degrees of understanding. We all assume that everybody knows the detail, but there are a lot of people that we talk to who are very unfamiliar with the politics, or even that Ireland is not one country; they do not see it is two and it is only as they come to visit that they start to understand some of those differences. So a lot of the things that we take for granted are not the case. Because we are targeting the type of companies that we want to go after, we find that we are eliminating at the front end the ones that would be looking for 12.5% corporation tax. So I guess like any good process, the quality control is going to take out any wastage at the front, rather than go through the whole process and discover you have a problem at the end. That is what we are trying to do by focusing on segmenting and targeting our marketing.

Q41 Naomi Long: Chair, the reason that I raised the issue was because I met recently with a company from China who were looking at investment in Northern Ireland and it was early stage; when they came they were basically on a fact finding. For them, it was an issue that they were raising with us when we were having the discussions with them.

Jeremy Fitch: I am familiar with the particular company you are talking about and they were coming, in a sense, proactively to us. We find that if we are segmenting and targeting our market, we do not have that problem as much, but we welcome any companies coming and having a look at Northern Ireland.

Chair: Mr Stride.

Q42 Mel Stride: I just want to come back to this issue of potential migration of businesses from the rest of the UK into Northern Ireland. I think I am right in saying that in the previous evidence session, Mr Donaghy suggested that it would be unlikely that this would be a major factor in what would happen if we lowered the tax rates. Yet, when you were going through the kind of things that you were looking for in terms of targeting businesses, you mentioned cultural compatibility, proximity to market and so on, and those would seem to me to be things that you are going to find in abundance in the rest of the UK. So would you agree with Mr Donaghy’s comment there, or would you take a different view?

Jeremy Fitch: I think of Mr Donaghy’s comment about how do you balance it and I like the idea that they are proposing that if the Revenue see particular tax claims coming in and there is not a balanced or pro rata employment level, so if the profits that are being attributed in Northern Ireland do not compare equally to the employment levels that they have in Northern Ireland, then that flags an issue for the Revenue and that is a way to deal with it.

On the issue of the displacement, there are strict rules within state aid and within the UK Government about jobs moving within regions. So for example, we do get a significant amount of investment from GB, but we cannot use UK taxpayers’ money to bid for those projects unless there is a threat of those projects being lost to the UK economy. So if a company just wants to move from Liverpool to Belfast and they say, "We are just moving," we cannot assist it. But if they were to say to us, "We are looking at all of the options"-say they were in south-east England or something like that-"and we are seriously considering Eastern Europe," UK taxpayers’ money can be used to keep that investment in the UK and if we do the economic efficiency tests to verify that the UK taxpayer gets a good return on his money, then we can support those projects.

Q43 Mel Stride: Sorry, Chair. This is the approach that pertains now, under current arrangements.

Jeremy Fitch: That is correct.

Mel Stride: Say we were in the new world of the 12.5% rate, would you not expect that the rest of the UK would be a significant target market for you to migrate businesses from the rest of the UK into Northern Ireland?

Jeremy Fitch: In the sense that if you have a 12.5% tax rate, you are allowing market forces to prevail at that point. The counter would be that the Revenue has a way of trying to balance it. One of the issues that we face is that the state aid rules that the previous witnesses referred to are changing. So in a sense our hands are going to be significantly more tied come the 1 January 2011 and all that we will be able to do is promote the actual benefits of Northern Ireland rather than offer as much financial assistance.

Chair: Mr Williamson.

Q44 Gavin Williamson: Mr Fitch, you probably cannot answer this totally accurately, but how much would you say Invest Northern Ireland has to spend in order to generate a job in Northern Ireland?

Jeremy Fitch: I can answer it. In the last eight years in inward investment, we have paid about £367 million to attract in or safeguard 35,114 jobs. On average, it works out at about £10,500 per job in assistance. In addition to that, we have a marketing budget for our overseas offices of about £5 million a year, which is there for the overseas operations and the sales teams.

Q45 Gavin Williamson: Right. Obviously, if you take the figures that you have put forward of 64,000 jobs and assuming that is 3,200 per annum, and then the cost per annum is £215 million, effectively that in some ways is a subsidy of £67,000 per job created, is it not?

Jeremy Fitch: Sorry, I do not understand where the £67,000 is coming from.

Gavin Williamson: Well, I suppose this is where my slightly bad GCSE maths probably starts to show, but £250 million per year is effectively costing in terms of tax cuts, isn’t it, by reducing corporation tax to 12.5%?

Jeremy Fitch: Well that is the question that I do not know the answer to. What I would say to the Committee, because it is a point I meant to get across at the start but didn’t, is that yes, this would make an absolute difference to us, but the element Invest Northern Ireland is not familiar with or does not know the detail on is the cost. Before a final decision is taken, we need to know, if we are going to make an investment, what the cost of that investment is. We do not know that at the moment.

Q46 Gavin Williamson: I believe the estimated cost is £215 million, which, if we took your figures, would be £67,000 per job created in a year, or £47,000 per job created if you used the higher figure from the Economic Reform Group of 90,000. I suppose one question would be, could you do a lot with £67,000 if you had to create an extra job per £67,000?

Jeremy Fitch: On the basis that we are creating and safeguarding jobs at the moment, the average cost per job is £10,500.

Gavin Williamson: Yes.

Jeremy Fitch: I cannot do the mental arithmetic, so-

Q47 Gavin Williamson: No, no, and it is a bit unfair. I was desperately working with the benefit of my calculator. But I suppose it was just a question and I thought the £10,000 figure was interesting.

Jeremy Fitch: Well that is the benchmark. The benchmark is £10,500 per job is what we have been putting in.

Gavin Williamson: Okay.

Chair: Okay, Naomi Long.

Q48 Naomi Long: Just on that last point, though it is a slightly different mechanism for attracting employment, and I think that is the issue, if this was an ongoing subsidy that was going to cost the £200 million in every year, that would be a different debate. The idea is that £215 million is your initial hit and then as you grow the economy, your actual take back is more significant; it is a smaller proportion of the profits made but the profits that you are drawing on grow. So the idea is not that you would be constantly out of pocket by that amount; that is the difference between the £10,000 subsidy, I would imagine, because that is something that, if things stay as they are, you would at least have to continue with a subsidy of that level to attract in those jobs, whereas this would be a step change in how you would be able to get actual companies to come in and generate income. So I think this is slightly different combination involved.

Jeremy Fitch: That is absolutely the correct point to make, because in a sense you can use £10,000 per job on average but there comes a point where there are diminishing marginal returns. I think the point that a lot of us want to make is that we have always consistently got a similar amount of investment, say it is between 2,500 and 4,000 jobs every year in inward investment. If you want to have a step change then there has to be a paradigm shift of some description. It is not as if, if you had so many more blocks of £10,000, would we able to get all of those extra jobs? I do not think so, because we have not been able to in the past.

Chair: Okay, let us move on a little bit. David Simpson.

Q49 David Simpson: Jeremy, I do not know whether you read the article yesterday in the Belfast Telegraph by the economist John Simpson-all these economists are fantastic guys-where he advocates a 19% rate, which would be a lot easier managed. That is one for another debate, but it is a very interesting article. The former guys might not agree with that, but that is one of the points that he put across. In relation to European aid, which is obviously going to be diminished, how will that affect your overall job of creating new investment in the area? Secondly, in relation to the economy and how bad things are at the moment across the United Kingdom, have you any insight to any companies that wish to pull up sticks from Northern Ireland and go to the Republic of Ireland?

Jeremy Fitch: Okay. I may just come back on the 19% point very quickly. An issue about the 12.5% is it just makes us the same as the Republic. It does not give us the competitive advantage; it just makes us the same. That is all I will say on that; it just makes us the same.

The SFA changes are what keep me awake at night at the moment; that is my big fear. At the moment, the state aid rules allow companies in specific regions within the UK, of which Northern Ireland is one, to offer a contribution towards eligible investment costs. So at the moment for large companies, all of Northern Ireland can offer 30%. On average, we are probably doing about 20%; we are trying to get the best value for taxpayers’ money, so we are not using the full 30%, just 20%. From the first of January, that drops for large companies in Belfast to 10% and for the rest of Northern Ireland to 15%. So our armoury for going out to win inward investment is going to be severely damaged come the first of January.

Your other question was whether, with the economy, there are companies wanting to up sticks at the moment. I think on that particular issue, companies want to make money. They will go where they can increase their revenues or they can reduce their costs. If it does not make business sense, they will be looking around for other locations. I was very encouraged last week at the conference that we had with the number of Chief Executives-not just Directors, but Chief Executives-of multinational US companies that went around that table and said they were pleased with their experience of doing business in Northern Ireland. That was a great endorsement to have and I think it reinforces the point that I made earlier. If we can get companies to come and have a look, underlying everything else, there is quite a strong proposition. The 12.5% is not the silver bullet to everything, because you need to have the skills there, you need to have an infrastructure there; telecoms, a transport infrastructure; and you need to have all of those other things in place to win the business as well, but as I said before, it would make a big difference.

Q50 David Simpson: Just to finish, Chair, are you aware of any companies in Northern Ireland that have brass plated in the south of Ireland?

Jeremy Fitch: Well there are a few-I cannot name any specifically, but I am aware of three or four that have from GB to the Republic of Ireland. We are also aware, if you think about it, of Northern Ireland indigenous companies, when they start to be successful and become profitable, that they will say to us, "How can you help us to be competitive in Northern Ireland compared with the Republic?" Basically, their business becomes mobile at that point. So if you are in Londonderry, for example, you are five minutes from the border. If you are in Newry, you are five minutes from the border. If you are in Belfast, you are 45 minutes from the border. So it is not far and that has become a big issue. There are companies that are saying to us, "Look guys, it is no longer competitive for us to do this, so how can you, Invest Northern Ireland, help in this particular scenario?"

Q51 David Simpson: I think, Chair, we saw that in the past with transport companies, where they have registered vehicles in the south of Ireland and are refuelling in the south of Ireland and taxing their vehicles there, because obviously there are lower rates, some of them are brass plating. So it is a major issue when you have a land border; there is no doubt about this.

Jeremy Fitch: Absolutely, yes.

Chair: Okay. Mr Stride.

Q52 Mel Stride: Just looking at the target markets that you were talking about - ICT, financial services and business services types of companies - if we have a reduced tax rate , we are in that world with 12.5% and have done what we want here, do you see that as applying just to new entrants into Northern Ireland or do you see that for all those businesses in those areas ? W hat sort of tensions and problems do you see there ?

Jeremy Fitch: Well, it is a good point. If I could maybe answer it in reverse, w e have a lot of existing investors that have made a big difference to Northern Ireland . I think if 12.5% was to be brought in and something was put in then to try to penalise some of the existing investors - say, for example, an increase in business rates - then all that would do is make the cost base for the existing investors that are there as a cost centre just more expensive and make Northern Ireland less competitive . I know that is answering your question maybe a little bit the wrong way round, but it is a big issue for us. We get a lot of investment and a lot of job s from the people who are already here and like any good business, you want to look after your existing customers, so we would want to make sure that they are looked after and that their investment continues to grow.

With regard to the new companies, what we find encouraging is that with some of the existing investors , once they come to Northern Ireland , w e can encourage them to look at other functions . So they have already got a footprint here; Citigroup , for example, when it came to Northern Ireland , came to do financial services and IT . N ow they do some back office operations and they also do some l egal and c ompliance . Alls tate has expanded into other functions. Caterpillar , which has a manufacturing operation in Northern Ireland , has recently opened a financial services and sales and marketing centre in Northern Ireland f or Europe , to look after those particular areas. So I think i t would allow us to go back to those multinationals and say, "What other functions do you have that would make good business sense for you to locate in Northern Ireland now that we have this advantage?"

Q53 Mel Stride: Thank you. When you look at the make - up in terms of businesses in Northern Ireland , you obviously have a very large public sector and you have a small private sector.

Jeremy Fitch: That is correct.

Mel Stride: A s I understand it, if you were to take the top dozen businesses there, they would account for quite a large slice of that, and then you have a very large number of small businesses , employing small numbers of people . What would you say to the argument that says that t hose kinds of businesses are going to be less favourably affected by a corporation tax change because t hey are making smallish profits, so the advantage of lower tax is not as great as perhaps for a large company ? T hey are employing relatively large numbers of people even though they are small, so payroll taxes are probably as important , if not more important. Is that an area that you can comment on?

Jeremy Fitch: I do not see it as a specific threat, because I do not see the situation getting any worse for them. If they have set up their operation to neutralise the tax effect, then the tax effect is largely less important for them. I come back to the previous answer: it might allow them to bring in some functions that do have a profit attribute to them, but largely, if the 12.5% comes in, it is not going to make any big difference unless there was some counterbalance to say, "We need to try to raise revenues in other areas," and that would make it more costly for them; for example, rates.

You are absolutely right. If I could give just some statistics for the importance of the international companies in Northern Ireland. Northern Ireland is largely regarded as a small business economy, because the vast majority of businesses that we have have fewer than 10 people, by a long way. In Invest Northern Ireland, we have 2,500 client companies; the companies that are largely focusing on exports and running business outside Northern Ireland. Of those 2,500 about 160 are internationally owned. Only 160; about 6%. They account for nearly 50% of the employment, over 50% of the sales, 50% of the research and development spend and over 70% of the exports; just that 6%. So yes, we are a small business economy, and it is important to focus on that and build that too, but the engine house of what is going on in Northern Ireland is also the international and we have to make sure that we look after those companies too.

Q54 Mel Stride: Okay. Final question from me on this: the Secretary of State has mentioned in the past potentially making Northern Ireland an Enterprise Zone. What would you understand that to mean in terms of the things that would be useful for the Province?

Jeremy Fitch: Well, it would be helpful to have a more detailed explanation of what different people mean by an Enterprise Zone, because it is quite broad. There were Enterprise Zones in the past in Northern Ireland in the early 1980s, where certain sections of Northern Ireland were given Enterprise Zone status. My understanding of that is that there was just displacement; that one business moved to another business and there was no net effect for Northern Ireland as a whole. So I think if we were to look at Enterprise Zones, it would need to be Northern Ireland as a whole, would be the first point. The second point is, does it make some of the changes that we would bring in temporary? The point the previous witnesses made was that if you want a business to come in for corporation tax, it needs to be pretty certain for a longer period of time; that they know that if they are going to make an investment for, say, 10 years, they will have that benefit for the 10 years.

On a positive front, though, are there other mechanisms that we could use that would be beneficial to Northern Ireland? For example, we have HBO filming in Northern Ireland doing a television series called Game of Thrones. This is magnificent for us; it is just fantastic, because if we want to build a creative media sector, it is difficult to do it via films that come and go, but if you have a company of HBO’s status that comes in and does a number of series, then you can build a cluster around that. Now, one of the issues that we face in the UK is that there is a tax credit for film but not for television drama production. The Republic of Ireland has that tax credit for television drama. So we want to make sure that companies like HBO come in and do TV drama in Northern Ireland, but if an Enterprise Zone status allowed us to have that sort of mechanism and put that sort of change in place, that would be wonderful.

Chair: Thank you. Any final questions? Okay, I think you have answered everything we wanted to ask you. Thank you very much for your evidence.

Jeremy Fitch: Thank you very much.

Chair: Thank you.

Examination of Witnesses

Witnesses:  Brendan Morris, Chair, Northern Ireland Branch, Chartered Institute of Taxation, John Whiting, Tax Director, Head of the Office of Tax Simplification, and Member of the Chartered Institute of Taxation, and Martin Fleetwood, Tax Partner, PricewaterhouseCoopers, gave evidence.

Q55 Chair: Thank you for being with us. I think you heard all the previous evidence. Would you like to perhaps introduce yourselves and tell us a little bit about what you do and maybe comment on what you have heard so far?

Brendan Morris: My name is Brendan Morris. I am the Chairman of the Northern Ireland branch of the Chartered Institute of Taxation. I represent a body of about 250 tax professionals working largely in private practice across Northern Ireland. Our branch then feeds into a UK network; we are one branch out of 30-plus branches across the UK. It is an entirely voluntary post; I also work for myself-I am self-employed-in private practice. It was our branch that surveyed our members; together with the assistance of my colleague here, John Whiting, at Head Office, we constructed a survey and collated the results of that survey to form the basis of the submission to this Committee.

John Whiting: I am John Whiting. I am Tax Policy Director at the Chartered Institute of Taxation. I have various other roles, including being involved with the Calman Implementation Group in Scotland. As Brendan has alluded to, the Chartered Institute of Taxation is the premier body for tax advisers; I usually say that all good tax anoraks are members of it. We have mainly members in practice, but we have members working in industry and indeed in HMRC, the Treasury and indeed two Members of the House of Commons are members. As well as a members’ body, we are constituted as a charity, which does keep our minds focused. So we are far from just a lobby group; anything but. We really exist to try to campaign for a better tax system and we pride ourselves on our independence and indeed our charitable activities such as our Low Incomes Tax Reform Group.

Chair: Thank you.

Martin Fleetwood: I am Martin Fleetwood. I am a Tax Partner with PricewaterhouseCoopers in Belfast and I specialise in corporation tax. I advise a number of private sector businesses in Northern Ireland, both indigenous ownermanaged and also foreign direct investment and I am definitely what John just referred to as a "tax anorak", I am afraid.

Q56 Chair: Thank you. Would you like to make any comments on what you have heard so far and then we will ask a few questions?

John Whiting: One immediate comment strikes me, if I may, Chair, and that is regarding the comments about the lower rates of corporation tax. We have, of course, experimented with a lower rate of corporation tax in the UK generally in recent years and one thing that that did lead to is quite a drive of sole traders to form companies on their own and to distort the decision for the smallest businesses whether they should practice as a sole trader, unincorporated, or through a limited company. Now of course, that was really given fuel when we had a zero rate of corporation tax for the first £10,000 of profits. I just mention it as another factor that perhaps needs to be borne in mind because an awful lot of small businesses practice as unincorporated; to reduce the rate of corporation tax does not of course benefit them on the surface.

Q57 Chair: Okay. Any other comments?

Martin Fleetwood: I am here representing PwC. We are not here to lobby for or against a lower corporation tax rate in Northern Ireland. As advisers to a large number of private sector organisations in Northern Ireland, what we want to do is encourage and stimulate a debate about corporation tax and maybe wider fiscal measures that may be made available to the Assembly.

Q58 Chair: Okay. Mr Morris?

Brendan Morris: Again, just to confirm what both John and Martin have said, the Chartered Institute of Tax in Northern Ireland is neutral in this debate. We are here to facilitate. We have collated our views in terms of the submission report to date, so we are glad to be able to assist the Committee as best we can.

Chair: Okay, thank you very much. Mr Stride.

Q59 Mel Stride: Yes, well welcome. I think it is fair to say that your submission has been less enthusiastic than some of the others we have received about the prospect of a lower tax rate in Northern Ireland. I just wondered whether you would disagree with a statement from the Northern Ireland Economic Reform Group, which said, "The only means we know of comprehensively changing the economic environment within a timescale of years rather than decades is to reduce the corporation tax rate." Would you disagree with that statement?

Martin Fleetwood: I think we remain unconvinced that a reduction in the corporation tax rate is the panacea for the significant problems that Northern Ireland experiences. Foreign direct investment has become a lot more sophisticated in recent years; there is a lot more competition in the foreign direct investment market. There are new entrants, such as India, China and Puerto Rico, and that raises questions in our minds about whether the experience of other countries, such as the Republic of Ireland, can be replicated in Northern Ireland using purely corporation tax as a single, some might say blunt, tool.

John Whiting: To me, corporation tax in many ways, as far as international business is concerned, is your shop window; it is the thing that you put up and say, "Low rates here"; it is just like the supermarket tries to attract you by offering cheap baked beans, or whatever. Having got that, of course, the supermarket tries to make its money on everything else; you try to make your money as a country on all the other taxes that investment generates, of which I am sure the Committee is well aware. I think all countries have got that message. Arguably the Republic of Ireland was ahead of the game with that particular tactic. Some of the newer members of the European Community-the Eastern European members-have also got that message and tried lower corporation tax rates.

I do not see that a lower corporation tax is by any means a bad thing, because of course it does mean you have the rate up in the shop window. There is, however, an element of it having been played by other people, and the question is whether there are other things, such as lower employment taxes or just looking at the general business atmosphere, that might sound a bit louder in certain cases,. I think when you talk to a lot of businesses that are evaluating locations, one of the great things they always cite is certainty. It has come out in discussions about how long a low rate would be. If you can offer them certainty, most of them will be able to factor in a higher rate, and quite happily so, providing they know where they are and they know how they are going to be for the years to come. So personally, I would not say that a lower rate of corporation tax is a bad thing; it is just that I think increasingly you have to look at-as I think I heard Mr Paisley saying-whether this is the only arrow in the quiver. I think these days, you have to look at a number of arrows in the quiver and work out which might hit the target best.

Q60 Mel Stride: Do you accept that the rate in the Republic of 12.5% has been a major contributor to its growth over the period of several years in which its economy was growing very strongly?

John Whiting: Certainly I see it as a significant contributor, yes. I think it has helped them enormously in terms of the shop window effect; it has tempted companies there and of course it has tempted companies to try to exploit the rate, and we have seen various antiavoidance measures and various cases taken to try to police the brass plating that perhaps has gone on.

Brendan Morris: I would go along with what John said. I would also say that in the Republic of Ireland that almost belies the work that their development agencies have undertaken. I think the IDA has been particularly proactive in promoting Ireland as a location for investment. It is interesting that presently the IDA no longer promote the 12.5% as the headline rate; they promote other factors for Ireland as a centre for investing in. So I do think it has been significant.

Q61 Mel Stride: Are we to some degree saying that there are a number of tax jurisdictions that have gone down this route now and therefore we are looking for other differentiators to attract people in? Is that something of what you are saying?

John Whiting: I think that is a factor that you have to bear in mind, yes. The Republic of Ireland did not quite blaze the trail, but theirs was quite a significant mark. Bear in mind that when they went down to 12.5%, it was, as you heard earlier, in response to a challenge from the European Court. The expectation was that, under European pressure, they would raise the rate generally to 30%, say. In fact, they cut it quite dramatically and of course led the way that one or two other countries have tried to follow-Estonia, for one.

Martin Fleetwood: The Irish experience says that the low rate of corporation tax was one of a number of factors, including other things like a very active and innovative investment agency, similar to Invest NI, an understandable civil law background, good infrastructure and the capitalisation of the cultural connections between the Republic and the US. I think there were a number of factors that they were able to draw together to create the economic boom experience. Corporation tax was one of those factors and it was arguably brand defining-the shop window-but we do not think it was the sole factor, or perhaps the most important factor.

John Whiting: They did manage to convince people that they were there for the long term and this was a rate you could rely on; they gave the certainty.

Q62 Mel Stride: Another quick question: Mr Fleetwood, in PwC’s evidence, you suggest that corporation tax may be, "Sufficiently unwieldy to form a single, central focus around which a subregional economic development strategy may be hung." I just wondered what you meant exactly by that?

Martin Fleetwood: I think this is the sophistication point, in that the other centres that are looking to attract FDI have become increasingly sophisticated and will continue to do so. You need more than one arrow in your quiver; the more arrows you have, the better. There are a number of nonfiscal and fiscal measures that a country wishing to increase its share of the FDI market may wish to consider exploring. In the fiscal area, it might be areas around, say, enhanced research and development tax relief, special regimes for intellectual property generation. We heard Jeremy Fitch mention Invest’s focus on the media, so perhaps wider incentives around media. All of those are examples of the types of tax relief that maybe there should be a debate about.

Q63 Mel Stride: All packaged within an Enterprise Zone concept; with that angle to it?

Martin Fleetwood: Perhaps. Again, that would be another one of those potential measures.

Mel Stride: Thank you.

Chair: Ian.

Q64 Ian Paisley: I think the point is, however, that without a change in corporation tax, Northern Ireland plc has been able to attract New York Stock Exchange to Belfast over Zurich, the Republic of Ireland and London. It was able last week to attract 63 new jobs to Newry that are in the high-end financial services sector, and other things like that, without this boost of corporation tax, which is incredible given all the potential downside that we hear. Is the point not what more could we do if we had this as well as all of these other things? I dare not think like this, but would we be in the luxurious position where we could actually turn people away and be very choosy about who we wanted to come and invest in Northern Ireland?

Martin Fleetwood: Potentially, yes. Again, going back to my earlier point, if the debate is broadened out to not just simply consideration of the corporation tax rate but also other fiscal measures that may be available to the Assembly, and if there can be a healthy and robust debate about what that might look like if it were possible, could it be possible and what might the benefits be, then that potentially goes further down the line that you were talking about, Mr Robertson.

Ian Paisley: Thank you.

Chair: On this point, yes?

David Simpson: Well, my question is tied into this.

Q65 Chair: Well, just before we leave, we have heard one or two suggestions that, in order to create jobs and boost exports, certain companies might be entitled to have a lower rate of corporation tax. I would just like your view on it. Could that work? It is bad enough different parts of the United Kingdom having different corporation tax rates, but could it work where you have different companies with lower rates depending on what they do and how much they create jobs, or would that be too complicated?

John Whiting: There are some possibilities, but generally, European rules say all the same. The once precedent I suppose we have in the UK as a whole is the differential rate for oil companies within the ring fence in the North sea; possibly that is a precedent. I heard some of the discussions about differential rates for utilities or banks. I do not think that is on. The current discussions about the banking levy; that would be a separate tax, rather than anything else, although again I know there are some subsidiary discussions going on about, "Well could the banks emulate the oil companies and have a sector-specific higher rate of corporation tax?" I think there are some possibilities, but of course you do then run into challenges. Among other things, how do you define the particular type of company that captures it?

Q66 Chair: The examples you have given are where there have been increased taxes applied, such as oil, banks and utilities; what I am saying would be in reverse-

John Whiting: Indeed.

Chair: Which is where sta te aid questions would come in. Is that correct?

John Whiting: Yes, I believe it is.

Chair: Okay, thank you. David Simpson.

Q67 David Simpson: I believe that if taxation powers were to be handed to Northern Ireland at no cost, it would happen fairly quickly. But there is a substantial cost to all of this, and that is the undercurrent of it all. Obviously I would like to hear your views in relation to the block grant, because if it cost £400 million or £200 million-whatever the figure may be-that would come off the block grant for Northern Ireland and it would be up to the Executive to use whatever powers it has in taxation to make that deficit up. Also, Martin, you mentioned on Ian’s point that taxation alone would not be the panacea; it possibly would take other fiscal measures or incentives. Could you elaborate a wee bit on that; on what you possibly believe they could be?

Martin Fleetwood: On the first question, it is embedded within the Azores judgment that if a country is granted the power to vary its taxation regime, the cost of that variation is borne by that country. So yes, the quid pro quo of a reduced rate of corporation tax, for example, is a reduction in the block grant. So there then has to be a discussion, a debate and a consensus formed around whether the incremental benefits outweigh the cost of that block grant reduction, those incremental benefits being increased VAT, increased payroll taxes and national insurance, increased rates through increased usage of property. All of those things would need to be brought into effectively a very complex financial equation. That would be a brave decision.

Q68 David Simpson: It would not be very popular under the current economic climate.

Martin Fleetwood: Well I think that is probably more of an economic question, which is to do with how effective those measures would be at creating valuable jobs at the medium or upper end of the income scale, because the people who benefited from that would benefit. On your second question, what could the additional incentives look like? Well they could look like an enhanced form of R and D tax relief, for example. There is currently an R and D tax relief regime embedded within the UK tax law; that could be used as a model and enhanced for Northern Ireland. I believe that would be consistent with Invest NI’s policies of focusing on value added, innovative, IP focused and led industries. Tax reliefs for patents for a generation of intellectual property; Enterprise Zones, whatever they might look like; tax relief for capital expenditure, which is what the classic Enterprise Zone model was 20 years ago. There are a variety of things that, given time and given debate, people could consider and conclude whether they would be beneficial or would end up in the margins.

David Simpson: Thank you.

Q69 Ian Paisley: Those things that you suggested, Martin-R and D; tax relief; capital expenditure relief; Enterprise Zones, whatever that means; tax relief on patents-do not have the same "Va va voom" or the same bang for your buck as, "Corporation tax: lowest in Europe". That can always get you in a number of doors and attracts a number of people’s attention because you are grabbing them right by their wallet. Would you agree?

Martin Fleetwood: That is the brand-defining question, isn’t it? I think it is probably beholden upon all of us in Northern Ireland who work with the private sector to think of an alternative simple, coherent message other than, "Lowest corporation tax rate in Europe".

John Whiting: Yes. I would echo everything that Martin is saying. I completely empathise with the fact that it is back to my shop window; if you can put in the shop window "Lowest corporation tax" or "Very low corporation tax here", then that is a very easily assimilated message and it opens the door to the dialogue that then allows you to talk about all the other attractions. Can I just come back with just a little point on Mr Simpson’s question? You talk about the cost and obviously the biggest issue is the block grant; Martin has dealt with that. I am sure you appreciate it, but I have to just point out that if there is a differential corporation tax rate within the UK, there is an extra administrative burden that must not be forgotten about for the tax authority and also, of course, for the companies that may have to manage it. It may not be very large, but it must not be lost sight of.

Chair: I think we want to come on to that in a moment. Can I just bring Mr Stride in here?

Q70 Mel Stride: A very quick question has been rumbling around in my head here: you are talking about a lower rate being like the cheap baked beans in the shop window that bring people in-a loss leader idea-the implication being that there are therefore other ways in which you will make this money from these companies. In respect of the Republic of Ireland, is it doing things that effectively mean that the tax differential between its headline corporation rate and ours is not as great as would immediately become apparent from looking at it?

John Whiting: It is not so much that it, for example, alters the calculation of taxable profits to claw back something. What I mean more is that they accept that they might, as it were, lose on the corporation tax baked beans, but then they are going to make a lot of money on the employment taxes; to us, PAYE, national insurance, of course VAT and all the other taxes. When you look at the actual contribution that a business makes, on one estimate, about 90% of the tax take, certainly within the UK, flows through businesses. So there is quite an argument, and some economists will push it, that corporation tax is your loss leader; anything you get is almost a bonus and you make your real money on all the other taxes.

Q71 Mel Stride: Are the payroll taxes and sales taxes and other things associated with these businesses comparable between the UK and the Republic of Ireland?

John Whiting: I believe so. They are very similar. Of course, we must not forget to look at other countries-for example, Belgium or France-where they legendarily collect much more via payroll taxes, so they manage to keep their corporation tax rates reasonable. The penalty is much, much higher payroll taxes-national insurance, to us. What has that led to? A certain amount of movement of employment companies into south-east England.

Martin Fleetwood: Can I come back on that last question, if I may? If you are comparing payroll taxes in the UK with the Republic of Ireland-just putting to one side the 50% rate of tax, which does not impact upon a huge number of people-then the total payroll and social security burden paid by your average Irish employee is greater than that paid by a UK employee. So the payroll taxes are more onerous in the Republic.

Brendan Morris: That is set to rise now, as well; the Republic of Ireland has a budget coming out in December time, and it is anticipated that there are going to be further income tax rises.

Chair: Sorry, just two more on this one and then I will come to -

Q72 Oliver Colvile: You made a very interesting point about Belgium and France and how that produced a lot of activity in south-east England. I am an English Member of Parliament; I am delighted to be part of the Westminster Parliament, which is obviously part of the United Kingdom. What kind of impact do you think this measure might have on the English economy and my region down in Devon?

John Whiting: Clearly, if there is a low rate of corporation tax on offer in Northern Ireland, it might take marginal investment away from the rest of the UK. It is a location decision and any company looking to locate weighs up a lot of factors. Go back to the Republic’s decision, one of the drivers for them was to offer companies clear compensation for the extra transport costs that they perhaps suffered by being further out from the rest of Europe. Northern Ireland might look at it that way, whereas Devon might say that, "We are closer, so we do not need to offer such a low rate."

Gavin Williamson: Closer to Cornwall.

John Whiting: Well, that is another issue.

Chair: Thank you. Mr Williamson?

Q73 Gavin Williamson: I think you made a very interesting point about the cost of employment in terms of to the employee. I probably was not paying enough attention, but h ow does the UK compare with the Republic of Ireland for the employer in terms of cost? I s it more?

Martin Fleetwood: Well employers’ social security costs; that is-

Gavin Williamson: It is a bit unfair; I realise you are not a tax expert on the Republic of Ireland.

Martin Fleetwood: Republic of Ireland payroll is a little bit out of my field of expertise, I am afraid.

Gavin Williamson: Yes.

John Whiting: I think it is marginally higher.

Gavin Williamson: Right. T hat is obviously a very big cost and as you were saying about the baked beans and whether that does have an effect on companies.

Mel Stride: Chairman, could I just ask whether it might be useful for the Committee to solicit from whoever we solicit these things some kind of comparison between the Republic of Ireland’s corporate tax regime and the UK’s tax regime at the moment, with all these various costs?

Chair: I am sure we can fit that into the inquiry somewhere, yes.

Mel Stride: Would that be al l right?

Chair: Certainly.

Mel Stride: Thank you.

Chair: Right, Naomi. We got there in the end.

Q74 Naomi Long: Thank you. You mentioned in speaking to one of the other Members’ questions about the additional costs of administration if there is a variation in tax. Now, I think it has been established that the loss of revenue, if you like, would come off the block grant, so if tax were not being raised, we would have to compensate. Where would we see the administrative cost? Would that also have to fall on the Northern Ireland block grant or would that be subsumed into the wider budget for collective taxation?

John Whiting: It is a very good question and I can say it is exercising the Scottish Parliament at the moment in respect of Calman. The working assumption is that the extra costs would, in terms of the Scottish changes, fall on Scotland. So I think, one way or another, the extra costs would fall on Northern Ireland. I would just put one important caveat to that. There are of course two areas of costs. There is, as it were, the overt cost of the tax authority, HMRC Northern Ireland branch. That can be seen; that is very visible and maybe that would have to be for Northern Ireland. There are the covert and more hidden costs, which is the company that has to calculate it and that has to carry out some extra calculations and has to perhaps go through extra routines; maybe has to do an extra return. I suspect that would have to be seen as a cost to the company and of course it would be a negative; only a tiny one in the great scheme of things, but the extra bureaucracy would be a negative. Of course, one of the things I think you would have to think about in any move to this lower rate is to keep it as simple as possible and to get quite pragmatic, perhaps, in terms of what returns the company that had activities across the whole of the UK had to do so it did not, for example, have to do endless schedules proving to the pound how much was and was not done in Northern Ireland versus the rest of the UK.

Q75 Naomi Long: Judging by your answer, you seem to be implying that this could still be done by the same tax collection bodies that we already have; that it would not require the establishment of a separate collection body. Would that be correct?

John Whiting: That would be my opinion, yes. I do not know whether-

Brendan Morris: Yes, I would agree with that as well. We are building upon fundamental UK principles in terms of computing tax liabilities. I do not see any requirement to deviate significantly from that.

Q76 Naomi Long: Have you any idea or estimate of what the cost of that might be? Would it depend very much on what the setup was in terms of how it is actually done, or would there be some way of estimating the cost of that in advance?

John Whiting: I suspect if you asked HM Revenue and Customs, it might be able to give you an estimate, but much would depend on what I alluded to, which is whether you are basically going to allow the company to do a fairly simple, rough and ready calculation and, of course, how much policing you want to do. Back to the earlier discussions on brass plating and potentially transfer pricing, it might, for example, be down to the Northern Ireland Authority to hire some extra tax inspectors to look at transfer pricing and perhaps bear the cost of those.

Naomi Long: Thank you.

Martin Fleetwood: Could I make just one comment on that? This may or may not be helpful, but we have very recently introduced in the UK a sort of subregional differential tax regime, in that we have a national insurance holiday at a limited level for new businesses taking on the first 10 employees. That operates for businesses in the North and West of the country. It is possible that somebody may have done some calculations somewhere about what the administrative cost of running that would be.

Q77 Naomi Long: It might be helpful for us to have those. Just one other question. We have established, obviously, that there is a cost in terms of the block grant. Do you believe that there are also wider implications for the application of the Barnett formula in the longer term if we have tax varying powers devolved to Northern Ireland as well?

Martin Fleetwood: I think that is certainly outside my field of expertise, I am afraid.

John Whiting: I think it goes further than I know of the Barnett formula.

Chair: It is a slightly political question, but -

John Whiting: Yes. All I can say is that in my experience of the Barnett formula, including the period before Lord Barnett tried to explain it, it is variable. I would imagine that if Northern Ireland has its powers, then it would want to look a little at how the moneys are allocated.

Chair: Maybe slightly linked to that, Mr Benton, you want to come in.

Q78 Mr Joe Benton: I was going to ask a question about whether you envisage a differential rate across Scotland, Wales, Belfast, England and how that would fall into line, particularly with the chartered institute, in wanting a more simplified tax system. It is obviously going to create problems, some of which my colleague previously referred to about admin costs and all the rest of it. I am sure there might be further ramifications in the sense of trying to simplify the system. I would appreciate any observations on that. Another question I would like observations on-I do not know whether you would have figures to back it up- it would be interesting to know how many companies, for example, moved from Northern Ireland to the Republic of Ireland through inducement by the lower rate of corporation tax. If you had any figures on that, I would appreciate it.

John Whiting: Perhaps I can start with the split rates, Mr Benton. Obviously, if there are split rates in a number of regions around the UK, you add complexity. As a body, we would argue against it unless it had been carefully thought through and the implications taken into account and, in a sense, you made sure that you were going to get value for money out of it. I admit I have another hat, which is I am the Director of the Office of Tax Simplification as well. Naturally, one of our aims is to try to simplify the system. That said, I am under no illusions that we can have a truly simple system in the UK; we live in a complex society. But, I go back to it, if we are going to introduce differentials and changes, let us at least make sure we have evaluated the cost and the benefit, and tried to do that change in as simple a way as possible. I will leave my colleagues to comment further on that and the Northern Ireland/Republic point.

Brendan Morris: Yes, well it essentially goes back to the principles established in the Azores case that each region has to have its own authority to make that decision: whether it wants to devolve tax powers and wants to choose to possibly reduce the tax rate. In terms of companies moving from Northern Ireland to the Republic of Ireland, I am not aware of any statistics or numbers on that. I think it might be very difficult to try to get numbers around that.

Q79 Mr Joe Benton: If I can just say that the purpose behind that question, of course, is it poses a question on the future for whoever has to make the decision whether this reduction be made or not. If you have no indices as to what will be the benefits of having a reduced rate, it makes the decision all the more difficult and harder, because you have to feel reasonably confident that this would be a successful venture and a successful thing to do. All the problems that have been posed, which have been mentioned all afternoon, about would it merely attract business from one depressed area to another throughout the UK; all these factors have to be considered. So I think the impetus and the prime objective in all this has to be how successful has a reduced corporation tax been in terms of attracting inward investment or outward investment; that is the crucial question and that is the drift behind my question.

If there were possibly figures available, for example, to say what was actually attracted into southern Ireland by a 12.5% corporation tax as opposed to-the nearest one I can think of is Northern Ireland. I am in no shape or form a businessman, but it seems logical to me that if I had a business in Northern Ireland and I could open up an hour’s drive away, it would be a big attraction to have 18.5% of my tax saved. So the drift from Northern Ireland to southern Ireland, I would suggest, is very important in terms of determining how successful it would be.

John Whiting: I suspect the main impact has been on foreign direct investment into the Republic, which has perhaps gone to the Republic rather than Northern Ireland or Devon or anywhere else in the UK, rather than drift south of the border.

Chair: Naomi, do you want to come in?

Naomi Long: My question has been answered.

Chair: Oh, you don’t; it’s been answered. Right, I think probably the final area is transfer pricing. Mr Stride.

Q80 Mel Stride: Yes. I think actually, Chairman, most of the brass plating questions I had have been answered.

Chair: Do you want to ask the last one?

Mel Stride: Yes, I can ask the last one. Do you think that the overall tax regime in the Republic is less strict in areas like transfer pricing than elsewhere?

Martin Fleetwood: Is less-

Mel Stride: Less strict in terms of approach to transfer pricing.

Martin Fleetwood: Well I suppose there is part of it that says that seeing as they have a low corporation tax rate, they would not need to put the same emphasis on transfer pricing as other Western economies with higher corporation tax rates. Transfer pricing is essentially around defending your own tax base, so the dynamic for the UK or the US or Canada or whoever for their transfer pricing legislation would be very different to that for the Republic.

John Whiting: Yes, I would echo that; they have less to defend. If I can come back just with a further comment on the brass plating issue, clearly the UK has defences at the moment with the Controlled Foreign Company regime and we have seen that applied quite vigorously to some of the attempted moves to Dublin with the Vodafone case and the Cadbury case. That has led to some changes in our own rules and some more changes are to come. There is a wider discussion going on, which may be relevant to your consideration, as to whether the UK generally should move to a more territorial basis of taxation and really try to focus on exactly what activity goes on in the UK or potentially within Northern Ireland. So there are quite a number of currents going on. That is partly in response to transfer pricing being a very time-consuming and complex exercise. The UK is quite vigorous at trying to apply it, but it is a complex and difficult thing that can drag on for many, many years.

Q81 Mel Stride: If HMRC were to be the body responsible for that aspect in the event of a reduction in tax in Northern Ireland, do you think they would have the resources and the capability at the moment to do an effective job there, or do you think they need a lot more specialists?

John Whiting: Perhaps that is a question you would best put to HMRC, who of course are looking at significant budget reductions. I did ask the Chief Executive last week as to the latest round and whether Calman and similar possibilities were factored into the HMRC plans. I understand Calman is factored in; I do not think any discussions in Northern Ireland are factored in. So I would suspect they would say that they would have to have extra resources. I come back to Ms Long’s question; potentially you could see them have to take on extra resources to manage the Northern Ireland differential rates and police it adequately.

Chair: Okay, we have had three long evidence sessions this afternoon. Can I thank everybody for their endurance and their patience, in particular our three witnesses now. Thank you very much for your evidence.

Brendan Morris: Thank you.

John Whiting: Thank you.

Martin Fleetwood: Thank you.

Chair: The meeting is closed.