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
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