Corporation Tax in Northern Ireland
Written evidence from Bombardier Aerospace Belfast
Introduction
1 Bombardier Aerospace Belfast is the largest manufacturing company in Northern Ireland, with some 5,000 employees, annual sales in excess of US$800M and generates close to 10% of Northern Ireland’s manufacturing exports. The Belfast site has benefitted from over US$2 billion investment since 1989 to make it a centre of excellence for the design and manufacture of fuselages, wings, nacelles and advanced composites, as well as after market support.
2 Bombardier Aerospace Belfast’s strategy is to provide our customers with innovative, higher added value aerospace products and services. As economies around the world recognise the wider economic benefits associated with the aerospace business sector (highly skilled workforce, cutting edge technology, extensive supply chain), competition to attract major aerospace programmes is intensifying. Bombardier fully supports a proposed reduction of the corporation tax rate in Northern Ireland as an important contribution towards the creation of a more competitive business environment in which we can more effectively compete for future long-term aerospace development projects.
3 What effect will the reduction in the corporation tax rate on a UK wide basis announced in the June 2010 Budget have on the competiveness of the Northern Ireland economy?
While a welcome step in the right direction, the impact of the reduction from 28% to 24% will have a very limited effect on our operations or on the economy. As part of Bombardier Aerospace, our Belfast operation regularly competes for work packages on new Bombardier aircraft programmes including against one or more of its sister sites as well as other potential host locations worldwide. In line with a focus on shareholder value and return, Bombardier Aerospace at Group level takes into consideration after tax returns as part of this evaluation and therefore the tax rate in any jurisdiction is very relevant to decisions on where to locate major long term development projects. The ability to participate in the Group’s investment plans going forward is crucial for the future of the Belfast operation.
4 What would be the benefits of equalizing the corporation tax rate in Northern Ireland with that of the Republic of Ireland?
A corporate tax rate reduction, from the 24% already announced in the UK, down to that applied in the Republic of Ireland (12.5%), would constitute a major improvement in the after tax competitiveness of our Belfast operation, and improve the competitiveness of Belfast bids for future long term development projects. More generally, as the Republic of Ireland also offers a R&D Tax Credit scheme similar to that of the UK, equalising the corporation tax rate would significantly enhance Northern Ireland’s relative value proposition for potential and existing inward investors.
5 What alternative measures could be introduced by the UK Government to make the NI economy more competitive?
A range of measures, in addition, rather than as an alternative, to tax equalisation with the Republic, are required to ensure Northern Ireland maintains and develops an attractive environment for its aerospace sector. As a major investor in research and development, Bombardier strongly believes that the on-going availability of, and improvements to, the R & D tax credit scheme, are essential. This tax credit is a key element in all Bombardier Aerospace Belfast’s bids. It directly impacts our competitiveness, and therefore has an important bearing on decisions at Group level on whether research and development programmes should be located in Northern Ireland. A good example of such a high technology programme is the Bombardier CSeries commercial aircraft programme launched by Bombardier in 2008, where Belfast successfully competed for and was awarded the contract to design, develop and manufacture the aircraft’s wings. The wings will be made mainly from advanced composites using a technology developed and patented by Bombardier in Northern Ireland. This investment, the largest in Northern Ireland’s history, is currently underway and has a total value of some £520 million which also includes a new fully equipped wing manufacturing plant. Some 800 jobs will be generated at full production with many more in the UK supply chain.
A further measure is also very important to Bombardier’s decisions on where to locate investments. Given the large scale initial investment and long development cycle (4 years or more) associated with aerospace development programmes, and the absence in the commercial market of viable financing for new aircraft programmes, the ability of the company to access repayable launch investment is critical. This type of investment is available in a number of other jurisdictions and, if UK is to remain an attractive location for large internationally mobile aerospace development programmes, it must be retained. Essentially, a range of measures are therefore required, including early stage R&D support, product development investment, and a favourable tax regime which takes into account that profits are generated through the normal 20 – 25 year aerospace programme life.
6 Is a reduction in corporation tax the simplest and quickest way to make the NI economy more competitive, and how long would it be before Northern Ireland realised the benefits?
We believe it is both the simplest and quickest way to begin to re-balance Northern Ireland’s economy. In addition to the other measures outlined above, it will significantly increase Northern Ireland’s attractiveness as a location, not only for future aerospace development programmes but also for the R&D-driven, high value added investment in other sectors which has been an indispensable element in the Republic of Ireland’s development as a formidable performer in the world’s export markets.
7 What are the legal barriers to the introduction of different corporation tax rates on a regional basis within the UK?
Any part of the UK which wished to have a different rate of Corporation tax would have to satisfy the criteria set out in the European Court’s Azores judgement. We understand that it has already been established that Northern Ireland, if given the power to determine its own Corporation tax rate, will be able to meet all the Azores criteria.
8 What would be the effect of reduced tax revenue in Northern Ireland?
It would be for the Northern Ireland Government to deal with the consequences of the initial reduction in the yield from corporation tax. The need to do so would not arise immediately since time would obviously elapse before the new arrangements were in place. It would then be for the Northern Ireland Government to decide when and how to trigger the tax reduction. This could, for example, be phased in over, say 3 years, to allow for the likelihood that it would take time for new foreign direct investors to be attracted by the prospect of a reduction in the corporation tax rate and to set up in Northern Ireland and begin making profits. If the lower tax rate were phased, the reduction in the amount available for NI public expenditure would likewise be phased. Given the prize of obtaining a powerful new economic weapon, any consequential reordering of public expenditure priorities would be fully in line with the Government’s aim of re-balancing the economy.
9 What evidence is there from other countries that having different corporation tax rates on a regional basis is effective?
There is extensive research literature indicating the effect of corporation tax reductions on the location of green field investment but one has to go no further than the Republic of Ireland to find a practical example. It has consistently achieved a share of foreign direct investment far in excess of what might have been expected on the basis of its factor endowments. Its 12.5% corporation tax regime is accepted by the Government of the Republic as key to that achievement. When the current programme of tax increases and spending cuts to reduce the Republic’s deficit was instituted, the Government made clear that the retention of the 12.5% corporation tax rate was a priority. According to statistics produced by the United Nations Conference on Trade and Development (UNCTAD), of 71 billion dollars of foreign direct investment attracted to the UK and the Republic in 2009, 25 billion dollars went to the Republic – a wholly disproportionate amount by any criteria. It represented 4% of all the foreign direct investment which went to developed countries. Critically important is the way in which the low tax rate has proved capable of attracting very high quality investment.
10 What are the implications for other regions if there were different levels of corporation tax within the UK?
There is no reason why lower taxes could not be deployed in other regions if considered necessary to deliver the required improvement in economic activity levels, provided that the Azores criteria are satisfied.
16 September 2010
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