Corporation Tax - Northern Ireland Affairs Committee Contents

Examination of Witnesses (Questions 1-31)

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 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.[1]

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.[2]

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 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 created 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 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 profit 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.

1   See Ev 221 Back

2   See Ev 220 Back

previous page contents next page

© Parliamentary copyright 2011
Prepared 9 June 2011