Examination of Witnesses (Questions 165-209)
Q165 Chair: Right,
we're there. Can I welcome you to the Committee? Thank you very
much for coming to give evidence today. Could I ask you very
briefly to introduce yourselves and give us a little bit of background
to your work please?
Richard Murphy:
My name is Richard Murphy. I'm a chartered accountant. I have
previously been in practice in London and have run commercial
companies as well, including as an entrepreneur. I now, however,
am Director of an organisation called Tax Research UK, which works
on taxation policy matters, particularly with regard to issues
such as tax havens and related issues, and I advise a range of
organisations including the TUC.
Q166 Chair: Okay,
thank you. Mr Bunting?
Peter Bunting:
My name is Peter Bunting and I'm Assistant General Secretary of
the Irish Congress of Trade Unions. On the island of Ireland
there's one confederation of trade unions—and I have responsibility
for looking after Northern Ireland—of which there are 220,000
members in 34 affiliated trade unions.
Q167 Chair: Thank
you very much, you're very welcome. Perhaps I could just start
the questioning with a fairly general question. As you know, the
Committee is looking at the issue of corporation tax, the difference
between the UK and Ireland, and the impact that has on the economy
in Northern Ireland. I wonder whether you could just, for the
benefit of the Committee, give us an outline of your views on
this. Would a lower corporation tax, with a harmonised corporation
tax for Northern Ireland, have a strong impact on the economy?
Richard Murphy:
Corporation tax is something that is charged on profits; profits
are only earned when there is strong economic activity. It's
therefore a bottom-line figure—in fact, it's a belowthebottomline
figure. The importance is actually to create a strong economy
in the first place. As an accountant, I was always terribly worried
when somebody came in to see me and said, "I want to make
a lot of money." I said, "No, you want to do something
very well; you probably want to employ quite a lot of people;
and you want to generate profit as a consequence—then we'll
worry about the tax." To suggest that tax is the way to
drive an economy is putting the cart very definitely before the
horse. What we need to talk about surely is how we get Northern
Ireland's economy going, and then worry about the tax afterwards.
This is not the right way to draw jobs; it is not the right way
to actually influence economic policy in Northern Ireland. This
is the wrong direction of travel, and I don't actually believe
it will be of benefit, because of some of the problems that I
outline in this report called Pot of Gold or Fool's Gold,
which I wrote for the TUC in the UK and in Ireland.
Q168 Lady Hermon:
What do you see as the right way?
Chair: What is the horse?
Lady Hermon: Yes.
Richard Murphy:
The horse is undoubtedly demand. The shortage in our entire economy
at the moment is of demand: we simply do not have people who want
to buy the goods and services that the private sector is supplying
at the moment. Therefore, the right course of action is in fact
to stimulate the economy. That is not going to be happening in
Europe at the moment, because of all the problems that are taking
place. That is not going to be happening in the Republic at the
moment, but the UK is in an exceptional position, in that it is
not constrained by the eurozone at this point of time. If Gordon
Brown gave us anything of a legacy, it was that: that he stopped
us going into the euro. So we have a strength which other countries
do not have; we have a free-moving exchange rate, we have the
opportunity to price ourselves into work, and we can make choices
that other economies can't about stimulating demand. If there
was real demand for products and services that were being made
both in Northern Ireland and elsewhere, then that would drive
the private sector economy in a way that nothing else could.
That's the top line, and that's where all stimulation for all
private sector activity comes from. Nobody makes money by saying,
"I want to make a profit". Everybody makes money by
saying, "I want to supply goods and services that are of
benefit to other people and deliver to them at a surplus".
Q169 Ian Paisley:
But you do accept that taxation, and taxation policy, is a stimuli
and is an influence?
Richard Murphy:
It is, in my opinion, way down the list of factors.
Q170 Ian Paisley:
I'm not asking where it is—it is an influence?
Richard Murphy:
Look—it has an impact, but the impact is really not very
much on the sort of business that Northern Ireland needs right
now. Northern Ireland needs new business that is going to generate
employment opportunities and long-term growth in the economy.
Tax, in my experience of looking at a great many tax havens around
the world that use this as what I might call an artificial factor
of production—one created by legislation to artificially
relocate transactions for relatively short periods of time into
a particular jurisdiction—is just that: it's artificial,
very difficult to sustain and doesn't actually generate wealth
in the long-term—
Q171 Ian Paisley:
You're the first accountant I've ever heard say you want to pay
more tax.
Richard Murphy:
Sorry?
Ian Paisley: You're the
first accountant I've ever heard of that wants to pay more tax.
Richard Murphy:
Nobody says they want to pay more tax, but an awful lot of people
actually are quite willing to pay fair tax, and particularly if
they get in exchange what they need from the Government.
Q172 Chair: Mr
Bunting, would you like to give your overall view on the issue,
and then perhaps we can take questions from Members?
Peter Bunting:
Well, the view of the Irish Congress of Trade Unions would be
that reducing the corporation tax or implementing the corporation
tax at 12.5% in a scattergun approach would not impact at all
in contributing to an economic dynamic in Northern Ireland. We
do believe that, quite rightly, there may well be incentives,
but they should be target-based and operate under a range of criteria,
such as, for example, research and development, the development
of innovative products, growth of exports, or job growth. Then,
certainly it would be our view that the difference in the amount
that companies would pay in the reduction of corporation tax to
12.5% from what the vast majority of companies, by the way, in
Northern Ireland pay, which is 19%, should be allocated based
on those criteria and only those criteria, because we have the
difficulty that there's so many other people for whom it would
only line their back pocket. There's no guarantee, as was even
identified by Terence Brannigan in his evidence as well, that
if you introduced a 12.5% corporation tax in a scattergun, blunderbuss
approach, that many, many companies or enterprises—for example,
if "Bunting Enterprises" was to benefit from that, there's
no guarantee about whether I would put the difference in my back
pocket and increase my profit, and whether I would grow one job,
or benefit the economy in Northern Ireland.
Q173 Chair: You're
aware of the situation in Ireland and the Republic of Ireland—obviously,
everybody is. We visited the Republic a week ago, and almost
every we person we saw was saying, "We are going to defend
our right to have 12.5% corporation tax". If it's so insignificant,
why are they so determined? Why are they risking political upheaval
actually, not just economic upheaval, if it's so insignificant?
Peter Bunting:
Well, I'm not suggesting that it's totally insignificant.
Q174 Chair: Well,
you didn't use that word, but that's the tone of both your arguments.
Peter Bunting:
What I'm saying is that public money should be utilised, which
is what a reduction in corporation tax is, for the benefit of
growing the economy. In relation to—
Q175 Chair: Which
economy? The private or the public?
Peter Bunting:
The private, and the public, in the long-term. But coming back
to the Republic of Ireland, there has been a lot of evidence here
about the Celtic Tiger. Let me say one thing: the Celtic Tiger
had its origins in 1987, when we all looked into the abyss, and
we decided we would enter at that time into the then Taoiseach
social partnership, which was one of the principles which it had
adapted. It only started taking off, if you watch through the
economic growth chart in the Republic of Ireland, from 1994, which
was two years after the single European market was introduced.
And Peter Sutherland would then advocate, "But why did the
companies move in and gravitate there; obviously they want to
be there as part of the market?" As well as that, you had
a very pro-European society in the Republic of Ireland; you had
a bureaucracy, which permeated every section of the European Union,
and in Irish terms, brought home the bacon in many senses. So
it was a very pro-European society, it could speak English, it
was in the European Union, and there was also—none of the
evidence produced so far has advocated this fact—a common
currency involved, which was difficult in relation to Northern
Ireland and the rest of the UK regarding sterling versus the euro.
So in many senses there was that. There was
also the fact that there was an education and skill base there,
and a stable environment; and why I'm saying about social partnership
is because it gave stability to companies coming in in relation
to the labour market, where wages were set for three years in
advance, so your cost structure was there. So for 21 years they
had a threeyear wage moderation as well, linked to a reduction
in tax, which was part of the social partnership deal. The Celtic
Tiger, by the way, only went from 1994 to about 2001. Corporation
tax came in at 2003 at 12.5%; at that stage we were on the downward
curve.
Chair: We are time-limited,
but the people in Ireland did say that that was not the only issue,
but they were adamant that they were going to defend their right
to have the 12.5%. However, there are a lot of people trying
to get in. Naomi, can I bring you in, and there are lots of other
Members who want to come in on this as well.
Q176 Naomi Long:
Hi, how are you Peter?
Peter Bunting:
Hi Naomi.
Naomi Long: You've accepted,
in terms of your written evidence, that, at the very least, 12.5%
corporation tax is a good marketing tool. If that's the case,
is that not, in itself, a worthwhile reason to consider its introduction
in Northern Ireland?
Richard Murphy:
One has to question whether a marketing tool that might cost £300
million a year is the right way to create a marketing tool. If
you look at the 12.5%, it is in itself an illusion, because the
truth is that the tax rate in the Republic is, for most corporations,
very much lower than 12.5%, and that is because of the way in
which tax is structured in the Republic, and it isn't anything
that Northern Ireland could compare with. I've outlined quite
a number of reasons in this report for that, but there are some
simple explanations for that. The Republic has no controlled foreign
company rules. Now, that means that dividends can flow freely
from tax havens that are owned by Republic of Ireland companies
in a way that would not, I suspect, be possible in Northern Ireland.
I really can't see that that's going to be replicated in Northern
Ireland.
There is an opportunity to pool dividends in the
Republic, which is not available in UK law, and it's unlikely
to be replicated. There is very lax—apparently very lax
and almost absent in some cases—transfer pricing enforcement
in the Republic. So, for example, the recent case which has been
highlighted with Google—I worked on this case with Bloomberg—where
their tax rate outside the USA is 2.4% and 92% of their sales
take place through the Republic: that's not by chance. That's
because the Republic is incredibly lax about the enforcement of
transfer pricing rules.
So we have to look at a situation where basically
the Republic has forgone its corporate tax base. A rate of 12.5%
is simply totemic of the idea that we're not going to tax you
if you locate a business here, and it has, as a result, become
not a place where jobs have come in any significant quantity,
but where profits have been allowed to flow. Now, if you look
at the Azores agreement, which I'm sure we will, you will discover
that one of the things that the Azores agreement does not allow,
for a regional corporation tax policy, is the location of intra-group
services enjoying that low tax rate. The vast majority of the
profits that are flowing through Ireland are exactly that: intragroup
services profits. So, for all sorts of reasons, what looks like
a marketing tool for the Republic would be a disastrous tool for
the North, and, in fact, wouldn't deliver the certainty that businesses
claim that they want. The EU Code of Conduct would simply block
that in most cases in Northern Ireland.
Chair: Well, that's an
area we do want to look at, but it's a separate issue.
Q177 Naomi Long:
There is another issue, I suppose, in terms of foreign direct
investment. In the evidence that we've heard, people are saying
it is very difficult for Northern Ireland to compete—not
on a skills basis, because actually we can compete on that basis
with the Republic of Ireland—but we're struggling to compete
in terms of corporation tax. It's off-putting for companies who
are looking at foreign direct investment in Northern Ireland,
because our tax rate is higher. You've suggested, when it comes
to FDI, that obviously a lot of the Republic of Ireland FDI has
been in financial services, and you've said that's a bad thing.
Apart from all your eggs being in one basket, as has been acknowledged,
what is the problem with attracting a lot of financial services?
Richard Murphy:
I have to say that seems almost like an odd question on a day
when we're talking about the Irish economy having to be bailed
out because all its banks have failed.
Q178 Naomi Long:
It's being bailed out because of poor regulation, not because
it attracted a lot of financial services.
Richard Murphy:
Let's be honest, it is not just tax that attracts in financial
services. They were attracted in part because there was incredibly
lax financial regulation, it is true; you could set up a hedge
fund in Ireland until a couple of years ago by filing the papers
at 3 in the afternoon and it would be open for business at 9 the
following morning; there was no effective regulation. Again,
if you don't compete with that lax regulation, which is what was
offered by the Republic, then you're not going to get financial
services in Northern Ireland. Again, the point has to be made,
the Azores agreement says, "You may not use this to attract
financial services into a location". In other words, if
that is the basis of the Irish competitive position to attracting
financial services, it is one that Northern Ireland couldn't replicate,
because Europe has said, "You can't do that". Financial
services and intra-group transactions are the two things that
are banned from benefiting from this low rate of tax, even if
the Azores agreement could be met. So it's a pretty artificial
argument with regard to Northern Ireland.
The other issue is that, frankly, financial services
always cluster. There is a theory of economics that shows that
the benefit always arises if you can put similar businesses next
to each other. It's why the best place to open a coffee shop is
next to a Starbucks; curiously, you'll get more business than
by opening some way away. A financial services business needs
to be next to another financial services business; that's why
the City of London works. That is why, to some degree, the Irish
financial services centre has worked—because there's a clustering
effect. The prospect of creating a cluster of financial services
businesses in Northern Ireland, when there is already the City
of London in the UK, is remote in the extreme, apart from the
fact the Azores Agreement wouldn't allow it.
Chair: I don't think we
want to concentrate too much just on financial services; there
are a lot of other businesses that we're talking about. Can I
bring David in first? He's been queuing up for ages.
Q179 David Simpson: In
listening to the discussion thus far, and taking what you two
gentlemen have said, I take it that the economic group that have
come to give evidence to the Committee—you've probably read
the report: the CBI, the Federation of Small Businesses, Invest
Northern Ireland, and the Minister of DETI—have got this
wrong and they haven't done their homework as regards corporation
tax, because every one of those groups advocated that it was a
stimuli to create more jobs within Northern Ireland. Are you
saying that in fact these organisations have got it wrong?
Peter Bunting:
What I'm saying to you David, very simply, is I'm not advocating
that a corporation tax reduction in a scattergun and blunderbuss
approach is the method of stimulating the economy in Northern
Ireland.
Q180 Chair: What
do you mean by scattergun and blunderbuss?
Peter Bunting:
A blanket 12.5%—
Chair: Well that's what
you've got to do. If we refer back to Europe, Europe ruled against
Ireland for doing it the opposite way, so which way do you want
to have it?
Peter Bunting: We
can invest in the Selective Finance Assistance, which we're doing
currently in Invest Northern Ireland, and utilise that finance
as a criterion-selected way of targeting those who wish to invest
in research and development and develop innovative products. Remember
one thing about Northern Ireland—I go back to Sir Richard
Barnett's independent economic review of how Invest Northern Ireland
did its business. I was there when he was presenting this report,
and he made one fantastic comment: "We competed with Bangalore,
and we lost". So on low cost, low wages, we lost out, because
what happened is that that was very susceptible to moving somewhere
else.
I agree with the question, how do we stimulate the
economy in Northern Ireland? I'm all for it, but let's do it
in a targeted way so that we're not just lining the people's pockets,
but, in introducing whatever we introduce, actually growing the
economy in Northern Ireland. That's my proposition, and my fault
line with what's been said to date. By the way, leaving the evidence,
nobody has stated specifically how much it's going to cost and
how many jobs they will create; that's the dilemma we all have.
Whereas I'm suggesting, if we do it in such a way that we target
it where we can prove that it's going to be invested in research
and development, which has some degree of sustainability and certainty
associated with it—if it's going to be about developing
innovative products that are going to contribute to the Northern
Ireland economy, grow the exports and grow jobs—then at
least we're getting some bang for our buck.
David Simpson: Okay,
right.
Peter Bunting: That's
where I'm coming from; it's not about suggesting that we shouldn't
spend money.
Q181 David Simpson: I
accept your point about our not knowing how much it's going to
cost, and I think the Finance Minister, when he was here, made
that point. It'll be somewhere towards the end of this year before
we really know how much it's going to cost—the lower you
go the more it's going to cost—and what payback time there's
going to be on that. We don't know about jobs either, because
there are different figures on jobs. But the gentleman who was
here from Invest Northern Ireland made it very clear that that
was the one thing that would help them to create a lot more jobs
in Northern Ireland—the one stimuli that would create that—and
that was one thing that was holding them back.
Peter Bunting:
Well, I don't think it's a single issue, and I don't think it's
the magic bullet, and we all agree with that. There is another
point that we have to identify. You posed a number of questions,
when other witnesses were here, about people's concerns about
movement from companies from GB to Northern Ireland. The interesting
thing about that is that companies didn't move from GB to the
Republic of Ireland. So if the 12.5% is such a wonderful stimulus,
why did companies from GB not move to the Republic of Ireland,
or, indeed, companies from Northern Ireland not move to Republic
of Ireland? You've got to answer that question. The only movement
of companies on the island of Ireland in the last two years has
been CocaCola from the Republic to Northern Ireland, with
the consequent loss of 270 jobs in the Republic—it transferred
its whole operation, bottling and manufacturing, to Northern Ireland—and
Aer Lingus from Shannon to the International Airport in Belfast.
So the only movement we've had, by the way, from this wonderful
paradise of 12.5% corporation tax, was to Northern Ireland. Why?
Those are the questions some people have to ask.
Chair: Let's carry on,
we've still got a number of people and we're still on early questions.
Ian.
Q182 Ian Paisley:
Coca-Cola were already in Northern Ireland.
Peter Bunting:
Yes.
Q183 Ian Paisley:
There was a contraction in business, so some people lose out.
During the same period there was a contraction in business for
Gallaher, where jobs in Manchester shrunk and jobs in Ballymena
increased; that's life. It's unfortunate, but that's life whenever
businesses are put under pressure. I'd say the reasons why Aer
Lingus moved was because of trade union activity in the Republic
of Ireland, which forced the company to look elsewhere and base
themselves in a regime where trade unions were there, but were
practising in a good fashion as opposed to a restrictive fashion.
I think there are some issues that need to be put on the record.
I want to go back to the comments you made, Richard, earlier
on. I'm not saying you're opposed to financial services coming
to Northern Ireland, but you indicated that, because there's a
cluster of them in the City of London and a cluster in Dublin,
the idea that you should put them in Belfast is really silly,
and we shouldn't be targeting financial services because that
might be a bad thing. I take it, then, in principle, you are
opposed to the New York Stock Exchange locating 400 financial
services jobs in Northern Ireland?
Richard Murphy:
No, of course I'm not opposed to that. You actually asked about
the creation of financial services as a hub inside Northern Ireland,
and my point was that that actually isn't deliverable under the
Azores agreement, and if you're going to try and actually be honest
and represent what is deliverable in an economy, the last thing
you want to do is mislead people. I'll give you a very small
comparison. The ruling from Europe that required Ireland to produce
the 12.5% led in the Crown dependencies—Jersey, Guernsey
and the Isle of Man, whose tax affairs I know intimately—to
what they call the zero-ten tax rate. Well, this Friday, those
are going to be reviewed by Europe, and I have very strong reasons
for believing that they have been misleading everyone that they
have for the last eight years got this right, and they are going
to be told by Europe that actually their tax systems are illegal.
Now, if you create a structure that you know might involve doubt,
risk, and uncertainty in the future with regard to its EU acceptability,
and try to market anywhere on that basis, you're going to get
the most enormous backlash in due course. If the Azores agreement
says financial services cannot be subject to this, but you then
set out to attract financial services into Northern Ireland with
a low tax rate, and it then goes wrong, the flood of jobs outwards
is going to be disastrous; alternatively, people are simply going
to look through this and say, "Too much risk, we won't come".
So I'm just saying it's the wrong—
Q184 Ian Paisley:
Are you for key financial services posts being created and generated
in Northern Ireland?
Richard Murphy:
But those aren't—
Q185 Ian Paisley:
Invest Northern Ireland has a strategy; one is to attract more
tourism jobs, and another key strategy is to attract financial
services and the makers of financial services—
Richard Murphy:
But those are, if—
Q186 Ian Paisley:
Are you saying you're opposed to that?
Richard Murphy:
No, not at all—
Ian Paisley: You're for
it then?
Richard Murphy:
But what you're talking about there is behind-the-scenes processing
within financial services. That is not the same as bringing in,
for example, banks that are undertaking international transactions
of the sort located in the Irish financial services centre—where,
it is important to note, most of the FDI since 2003 has gone in
the Republic; and the average number of jobs, as Jim Stewart at
Trinity Dublin has shown, for each company in the Irish financial
services is actually zero, extraordinarily.
Ian Paisley: Well, 400
jobs in the New York Stock Exchange will not be zero—
Richard Murphy:
Yes, but that's a processing job; that's not the same as a financial
services job.
Ian Paisley: But I'll
tell you what it does. It creates PAYE.
Chair: I think we're going
round in circles.
Q187 Ian Paisley:
It creates PAYE into the Exchequer, and it creates,
importantly, private sector employment.
Richard Murphy:
But I don't think this will qualify as financial services jobs,
if I can be honest.
Q188 Chair: If
the Westminster Government gave the Assembly the ability to reduce
corporation tax, and it reduced it to 12.5%, and that attracted
financial services companies; that's not breaking any rules at
all.
Richard Murphy:
Well, it appears to be breaking the rules of the Azores agreement,
which says you may not attract businesses by using a regional
tax rate. It says you may not.
Chair: So Europe would
step in and prevent Zurich, for example, who are thinking about
some relocation, from going to Northern Ireland?
Richard Murphy:
They would not stop a processing centre in Northern Ireland only
by that.
Q189 Chair: But
would they prevent that?
Richard Murphy:
But they would stop it on two bases. One is if it's a pure financial
services company—in other words, undertaking a regulated
financial activity. It appears that that is going to be outlawed
by Europe under this, and remember, we've only got the Azores
example to go on. The second one is—
Chair: Well, exactly;
that's a good point.
Richard Murphy:
And it is only the Azores example to go on, but it does create
risk and when you are creating risk, business will run away from
it. And the second thing it says is, you mustn't do intra-group
transactions on this basis.
Q190 Lady Hermon:
Just for clarification, you've repeated the phrase, "that
Europe will say", or, "Europe will tell us in a particular
ruling". Do you mean the European Court of Justice in Luxembourg
is going to rule in relation to the tax regime that has been operating
in the Isle of Man, and Jersey and Guernsey? Is it a European
Court of Justice ruling that will bind the UK Government, or is
it the European Commission? Who is going to clarify this?
Richard Murphy:
It is the EU Code of Conduct Group, who report to ECOFIN—the
Economic and Finance Ministers—and they impose it on the
member states and expect them to enforce it inside their jurisdictions.
The UK will be required to get Guernsey, Jersey and the Isle
of Man to change their tax laws as a consequence.
Q191 Lady Hermon:
Okay. So it's not of the same status as the Azores ruling?
Richard Murphy:
No. It's a different body altogether in that case, yes.
Lady Hermon: Thank you.
Joe Benton: Yes. The
questions that I had have become somewhat redundant in view of
the recent exchanges. I was going to ask, in view of the ICTU
report, just how strong your opposition was to the equalisation
of the corporation tax.
Chair: I think we've got
some measure of that.
Q192 Joe Benton:
Obviously, your fierce opposition is not unnoticed. Can I put
this question to you: are there any circumstances or combination
of other incentives that, if put to you, would somehow weaken
your opposition to—or what seemed to be your total opposition
to—equalisation of the corporation tax? You referred to
a point that I absolutely take: that it's not just the magic corporation
tax, that there are other factors, and that that's all the evidence
we've had so far. If I may say so, your opposition to corporation
tax seems so vehement that it appears to me to be excluding it—not
now, not ever. Combined with other incentives, can you envisage
a position where a reduction in or equalisation of the corporation
tax would be beneficial?
Peter Bunting:
For me, if it was for a manufacturing company who were going to
manufacture jobs and create stuff in Northern Ireland, I've no
problem with it. But if it was for "Bunting Enterprises",
a banker or a utility company, and it was to increase more profits,
and they're going to increase energy prices, sponsored by my own
money—taxpayers' money, anyway—why would I? I think
we're all for incentives to grow the private sector, which Northern
Ireland is crying out for. It's how we get to that particular
stage, rather than describing it as corporation tax, because then
what happens is the scattergun approach. People who will not contribute
one iota to the Northern Ireland economy will make additional
profits, and that's my difficulty. Other than that—
Q193 Chair: That's
quite an extraordinary claim.
Peter Bunting:
Do you understand the point I'm making?
Ian Paisley: No. Not
really.
Chair: I think it's an
extraordinary claim to make—that a company going in creating
profits doesn't help the economy of Northern Ireland. That's an
extraordinary claim.
Peter Bunting:
No I'm not talking about a company making profits; I'm saying
that the owner of the company makes the profit. There's no guarantee.
If I'm putting public money into a company, I would like the criterion
to be that the end result, the outcome of that money, is creating
jobs, is growing the economy, as opposed to growing an individual's,
or shareholder's, profits. There's a difference.
Chair: Okay. Can I take
Mel, who's been waiting very patiently?
Joe Benton: Sorry, Chair,
but I would be interested in Mr Murphy's comment if you wouldn't
mind?
Q194 Chair: Go
on.
Richard Murphy:
I do think that there are obvious things that could be done.
As I said when I introduced myself, I have created a number of
real businesses; I am very aware of the sheer thrill of creating
jobs; it is one of the most exciting things that anyone can do,
and I've done it. So do not get me wrong about this; I would
love to see more jobs in Northern Ireland, but if you're going
to do it, the best way by far is not to reduce tax. The best
way by far is to look at the businesses that are already in Northern
Ireland and work out how they can be encouraged to grow. This
is a policy about bringing in transitory businesses—and
I'm afraid that's one of the characteristics of this sort of policy—who
will take their profit out again the moment that it's arrived:
they will use it as a conduit. Instead, you want to have, for
example, an extension of loan guarantee schemes to make sure that
small businesses can access capital or mezzanine financing; new
mechanisms to provide the capital that they need to grow the existing
businesses in Northern Ireland in order to exploit the opportunities
that are already there—the people who are going to stay
in the long term because they're committed to Northern Ireland.
If there's to be a way to spend money, that's how to do it.
There will be major distortions as well in the Northern
Ireland economy if you actually introduce a 12.5% corporation
tax, because it will create significant distortions with regard
to the income tax system. As we saw when we had a 10% corporation
tax rate in the UK for a period of time, which was not one of
Gordon Brown's finest moments, perhaps, we saw a massive number
of people shifting from being self-employed into running limited
companies. It distorted activity; it created artificial contracting.
All of these activities could take place. They're not real growth;
they're actually deliberate undermining of the revenue stream
of Northern Ireland. If that comes out of the block grant, that
is a very unusual way to use funding, and that would worry me.
Q195 Mel Stride:
Thank you both for coming in. It's been a very lively session,
if nothing else. Let me start with something we can, I think,
agree on, which is in your report, as Naomi has mentioned. You
say that lower corporation tax is at least a useful marketing
tool, and that it is no silver bullet: it doesn't in and of itself
generate all this inward investment, and so on, which is not what
I think the Committee has been hearing from others. Yet it is
the case, is it not, that the Republic of Ireland has drawn in
about two and a half times the average EU level of inward investment
of FDI whilst it's had these low tax rates? So my first question
to you would be, if it hadn't been operating under a tax regime
of 12.5%, but, say, 28%, do you think that would have had a significant
impact on the level of FDI into the Republic of Ireland? My second
question relates to a comment made by Mr Bunting earlier about
seeking to grow both the private and the public sector in Northern
Ireland. One of the things that the Government are seeking to
do is to rebalance the economy in Northern Ireland—where
77%, as I understand it, of the Northern Ireland economy is accounted
for by the public sector—to grow the private sector. Do
you think that that rebalancing policy—this is my second
question—is the correct policy, or should we be seeking
to stay roughly as we are, or indeed growing the public sector
further?
Peter Bunting:
Can I answer the second point first?
Chair: By all means.
Peter Bunting:
The reason why we have a large public sector in Northern Ireland
is because we are a very small private sector. It's not the size
of the public sector; it's actually the size of the private sector.
If you look at it in comparison with the region of, I think,
the north-east of England, the public sector in Northern Ireland
is two percentage points higher. That's where it's at. The difficulty
that we have in Northern Ireland is that we have a very small
private sector, and the reason for that is very simple. Unlike
the Republic of Ireland and other places, when you talk about
stability—certainly, we had 40 years of mayhem and conflict,
ridiculous stuff, which held us back from developing as an economy.
So we lost out for 40 years, and we're playing catch up. So
that's the reason why that's there; there's no other wonderful
reason. Plus the fact that in one sense, of course, we were an
economy dependent on heavy engineering and we've lost that and
the textiles; that all went over the last 20 years, during this
mayhem. So those are the reasons why we're an undeveloped economy
and a bit dependent on the public sector.
Those are the reasons why 68% of GDP comes from the
public sector. We should also realise, as well, that Northern
Ireland, in purchasing goods and services, purchases from the
private sector in Northern Ireland £3.28 billion-worth every
year. So in that sense there's a virtuous circle of purchasing
goods and services. With relation to the Republic of Ireland,
there's a report from the IDA of 2000 that is prior—I repeat,
prior—to 2003, when the 12.5% corporation tax came in. It's
a publication that recognises that tax cuts did not create the
Celtic Tiger, and I can give it to your Secretariat for evidence,
as well. So, this business of "the tax cuts made the Celtic
Tiger" is absolute nonsense. If you look at the tax rate,
corporation tax at this stage, in 2000, was 20%. The statistics
are there about employment, and which sectors the companies were
from: they were from the UK, Germany, Asia-Pacific, the rest of
Europe, the rest of World and the US. Some 524 were in situ in
Republic of Ireland prior to the 12.5% corporation tax being introduced.
Q196 Mel Stride:
But my question is, on the public sector, do you agree with the
Government's approach, which is that we believe there is a need
to rebalance the economy and that the public sector should take
a smaller proportion of GDP in Northern Ireland?
Peter Bunting:
Well, I would only say that in the context of growing the private
sector. It should be done in a parallel movement. To do it the
way things have been done currently by the Government will drive
Northern Ireland into a depression. Northern Ireland cannot sustain
the loss of 30,000 jobs and a very underdeveloped economy. One
of the other targets we need to address is stimulating our skills
base, which Naomi was talking about, and tackling the huge number
of economically inactive people. We need to tackle that with
the skills base.
Q197 Mel Stride:
Will you not accept, in the case of stimulation, if you take the
Republic, if you include all the bad debts associated with the
banking system, we're up to a deficit of effectively north of
30%, compared to our 11.4% in the UK? There's very limited scope
for pumping these economies up any further.
Peter Bunting:
I'm not so sure—
Mel Stride: If you look
at public sector jobs.
Peter Bunting:
Well, if you excluded the collapse of the banking sector in the
Republic of Ireland—it's a reasonably sound economy, by
the way, despite the recession, in the sense that our exports
are still growing by 6% this year, and there's still an inflow
of jobs into companies who are manufacturing, by an extra 6,000.
You were looking for that information, and I brought that as well,
Mr Chairman. I know somebody promised it to you and I brought
it. I am talking about information on the growth of jobs this
year in the Republic, from the IDA; I have it with me and I'll
leave it with your secretariat.
Q198 Lady Hermon:
Can I just clarify that you did say that you were fearful of a
depression; it wasn't recession that you said—
Peter Bunting:
No I said a depression. We're already in recession in Northern
Ireland.
Lady Hermon: Yes.
Peter Bunting:
To lose 30,000 jobs in the public sector—I think the Finance
Minister quoted 28,000; our projections are around 30,000—and
then the consequent 16,000 in the private sector—
Q199 Chair: What's
that based on, because we don't know the hit figure—it's
referred to as the hit—if corporation tax were reduced?
We don't know that figure, so how can you know this figure?
Peter Bunting:
Well, the figure is produced by the Minister of Finance and Scottish
parliamentary model, which we extrapolated and utilised across
Northern Ireland: that for every £1,000 spent that is lost,
you create X amount of job losses in the public sector.
If you look at taking 30,000 disposable incomes out of Northern
Ireland—
Chair: I understand that
point—
Peter Bunting:
About 16,000 jobs—
Chair: I don't know how
you get to 30,000 if you don't know the original figure.
Peter Bunting:
Sorry, the original figure is £4 billion over four years—
Chair: No, no. Your argument
is that if corporation tax was reduced—
Peter Bunting:
Sorry, no—I'm talking about the current expenditure—
Chair: That's a completely
separate issue.
Peter Bunting:
Sorry; that's what I'm talking about. I moved into that in a
broad sense.
Chair: That's a completely
separate issue. Can I bring Naomi in?
Q200 Naomi Long:
You've mentioned, for example, the potential job losses and the
impact it would have on the economy if you took a reduced rate
of corporation tax. Obviously, at the initial phase what would
happen is that your tax take would be reduced. However, if you
grow profits and companies, and if you attract more profitable
companies to Northern Ireland, potentially, even with a lower
rate of tax, you could end up actually having more tax revenue
collected. So is it fair to say that you would have to look at
the projections in terms of what it could do regarding growth,
in order to measure what impact it would have? It would not be
fair to take the first year and assume that that is a steady state
that you would be in for ever and a day. You would have to take
the first year, then you would have to look at projected growth,
in terms of profits—you can dispute whether it's growth
in terms of other things. You'd have to look at growth in terms
of profits and then work out whether or not the profits that would
grow in companies, and the potential for companies to come and
create profit, would actually eventually lead to more money coming
into the economy.
Richard Murphy:
The problem with that analysis is that you're assuming that you're
dealing with what is a closed economy; in other words, the profits
that you are going to generate in Northern Ireland are going to
stay in Northern Ireland. The fact is that the model from the
Republic, the model from most small states that have tried a low
tax path, is that the profits flow—
Naomi Long: No. You'll
only assume they'll be taxed in Northern Ireland; you'll only
assume they'll be paying tax. If they go out of Northern Ireland,
I've said that it wouldn't necessarily create jobs and other things,
but it would create profit at the point of taxation, so it would
be taxed in Northern Ireland.
Richard Murphy:
Let me, however, look at that in the context of other data. First
of all, I've already explained to you that actually in the Republic,
although the notional tax rate is 12.5%, for very many corporations
it is near 0%—very near for many of them—and they
quite openly say that, because it is so easy to transfer price
through there, the treatment of dividends is so lax, and there
is the control of foreign company rules and so on, which I've
already mentioned. But we also have to look at the UK situation.
I have been monitoring the tax gap of large corporations in the
UK for a number of years on behalf of the TUC. The headline rate
of corporation tax in the UK was, of course, for quite a number
of years 30%, and, from 2000 to 2006, the effective tax rate of
the largest companies in the UK fell from 28% to 22%. The effective
rate of corporation tax at the moment that I can work out—this
is a little complex because of the impact of the financial crisis—is
21% in the UK. That's 7% less than the headline rate.
Well, if we're talking about that being replicated
in Northern Ireland with the 12.5% rate, that comes down to an
effective tax rate of little over 5%. Now, 5% of how ever big
the number of profit is, is very little contribution to make up
the losses that will arise. I'm not disputing that, if a criterion
is attached to earning these profits of having some labour in
Northern Ireland, creating some employment—although that
is exceptionally difficult to do under EU Code of Conduct, where
there is no basis for that inside the rest of Europe, and they
require consistency for such models to be acceptable—yes,
people would put a few jobs in. But 5% corporation tax, even if
it flows straight out again, produces a remarkably small input
into the Northern Ireland economy, and that worries me. I don't
see the feedback for this enormous investment that is being asked
of the people of Northern Ireland generating a return to compensate
them for the loss they're going to suffer from the block grant.
Oliver Colvile: Thank
you very much for the most riveting afternoon I think I've had
for a very long time. I'm being absolutely serious; I have found
this very interesting. I have to say that the structure of what
we were going to ask you today has, I suspect, had a coach and
horses driven through the middle of it, so thank you for dealing
with that.
Chair: You can blame the
Chairman for that.
Q201 Oliver Colvile:
I have to say I found part of this actually quite confusing and
challenging to work out. I have similar problems in my constituency
in Plymouth, where there is exactly the same kind of problem with
dependency upon the public sector. That is obviously going to
be hit quite badly as the cuts in public expenditure take place
and a reduction happens, and we therefore need to find ways of
employing people and making sure that they contribute and that
we have a stimulating potential economy. After I finished here
last Thursday, I drove down to Plymouth and I watched on Channel
4 a very interesting programme about what had been taking place
in Hong Kong, which doesn't have all the regulations and some
of the problems which the European Union imposes upon us. I just
want to understand: if you were the person who was going to be
responsible for trying to make sure that the Northern Irish economy
could grow and work, how would you go about doing that? Would
you take into account what has actually happened in Hong Kong,
where, as I understand it, they decided to get rid of VAT and
they actually reduced taxation in quite a big way, and saw a significant
amount of growth, which then took place? Is that a silly way
of behaving, or do you think that that is actually quite attractive,
because my personal view is, the lower you can make taxes, the
greater the encouragement to get people to create businesses and
industry and growth?
Richard Murphy:
Can I leave you a copy of that afterwards?
Oliver Colvile: Please
do.
Richard Murphy:
It is my book on tax havens, and it explains why these places
sometimes work. I haven't got lots of them—
David Simpson:Free sample?
Richard Murphy:
No tax on this book—it's free. I felt that Michael Durkin,
who made that programme, made an extremely poor comparison between
Hong Kong and the UK, because you have to look at what happened.
First of all, when Hong Kong introduced the tax system that it
now has, it was imposed on it in a nondemocratic way; nobody
voted for it, it was imposed by a colonial Government; that happened
to be us. I am not sure you would get such a change through any
democratic, elected Government in Northern Ireland at the moment.
Secondly, you have to look at the historic situation of Hong
Kong. It's tiny, and next to an enormous state that was looking
for an incredibly long period of time to send goods into the western
economy and appears not to be doing so, and that therefore had
one conduit for that purpose, which was Hong Kong, substantially.
As a result, Hong Kong could tax two rents exceptionally
highly; one was the fact that profits in Hong Kong could be much
higher than they would otherwise have been, because of this exceptional
circumstance—that everything had to flow through Hong Kong.
Now, Northern Ireland hasn't got that advantage; nobody has to
send goods through Northern Ireland to get to anywhere, unfortunately,
and therefore it can't extract a rent in the same way that Hong
Kong could on goods flowing out of China. So it hasn't got that
reason for a profit flow, which Hong Kong could exploit.
Secondly, because Hong Kong is tiny—let's be
honest, it's had to create a lot of its land mass to meet demand—it
can charge extraordinary rates of tax on land, which has meant
it can have very low rates of tax on profit, on labour, or on
anything else. Therefore, its tax base is these rents; it is
not particularly labour, or sales, or anything else. Therefore
its economic situation, compared with Northern Ireland, is absolutely
incomparable. So to say it's a model that can be transferred
into the UK—again, nobody has to send something into the
UK to send it onwards, let alone into Northern Ireland, which
is on an extremity, not a point of flow—is an impossible
comparison to make. In that sense his programme was deeply misleading.
Q202 Chair: That
is one aspect to it, but that was only one part of that programme.
Apologies for those who didn't see it; it was called "Britain's
Trillion Pound Nightmare", or something like that. I have
to say, in the best part of 40 years watching programmes like
that, it was the best programme I've ever seen. It didn't just
focus on Hong Kong; there was a bigger issue: public spending
and private sector growth. Do you agree with the basic thrust
of the programme in that respect, because that was the main aspect
of it?
Richard Murphy:
Well, let's be clear: what he was proposing was something which
is from beyond the current normal political spectrum in the UK.
It is a very strongly libertarian, strongly free market economy,
of the sort which perhaps the Tea Party movement in the US is
supporting, but which has not got, at the moment, very strong
support inside the UK. He was talking, for example, about eliminating
most benefits, and while I think that most people in this country
would have problems with the elimination of most benefits, halving
state spending in the UK would be a fundamental transformation
of our society. Would it generate extra growth? Personally ,I
don't believe it would.
Q203 Chair: You
don't?
Richard Murphy:
I actually think that our economy, unlike the economies of places
like Hong Kong, which are very fundamentally different, because
people can come and go as they will—the same is also true
of many of the small tax havens which have tiny populations in
comparison to the financial flows through them. When you have
a static population, you need to support that population with
real jobs, real benefits, real long-term futures, real pensions
and so on, and that is the state sector. I see the two working
symbiotically together; I call it the cappuccino economy—strong
coffee on the bottom, white coffee on the top.
Chair: Jack.
Jack Lopresti: Is it my
go?
Chair: Although we have
been all over the place, we've covered most of the issues in a
sort of piecemeal manner, but go on.
Q204 Jack Lopresti:
Well, thank you for coming, and I agree with Oliver that it has
been very interesting. What steps do you think are required for
Northern Ireland to have its own corporation tax rate and to comply
with the Azores judgement? Do you think these steps provide any
insurmountable problems? Right, off you go.
Richard Murphy:
Peter seems to be indicating that I should answer this one. The
first requirement would of course be that the Northern Ireland
Government be given the power to change their tax rate, and clearly
they haven't got that at the moment. There is, in my opinion—having
looked at a lot of these issues over some period of time, perhaps
more than most people, of how Europe works on giving these sorts
of concessions—an extremely strong chance that the fact
that the UK would have to simply give permission in the first
place for Northern Ireland to change the tax rate would be seen
as a series of connected events that mean that Northern Ireland
was not taking this decision independently, which is the requirement
of the Azores decision. This is entirely different, for example,
from the Gibraltar decision that we're expecting very shortly,
where Gibraltar has had what is in effect an independent administration
for a very long time, and where we can't say that the UK has been
setting its tax policy for years past, because it hasn't been.
Whereas this would be: one day, we give it the power to change
its tax rate, and then mysteriously, a short time later the Assembly
decides to change the tax rate. The coincidence may be too strong
for Europe to accept; I think there's a real chance of challenge
as a result.
Secondly, I think we could not have a situation where
it would just be one HM Revenue and Customs covering UK and Northern
Ireland, administering two entirely separate tax systems, because
we would have substantial transfer pricing issues going on. With
the greatest of respect to many members of my own profession,
I'm a chartered accountant, the opportunity to shift profits out
of Great Britain into Northern Ireland—we could at this
point separate the two in that way—would be too great to
resist. They would be looking for every opportunity to do so.
You would need to have two tax authorities who were basically
able to negotiate with each other at arm's length. You would
therefore need to have transfer pricing arrangements in place
for every single product, shipped, for example, from Sainsbury's
in the UK to Sainsbury's in Northern Ireland, or Tesco, or whoever
it was. Baked beans would suddenly become the subject of transfer
pricing disputes across the border with Northern Ireland, because
those sold in Northern Ireland would be subject to 12.5% tax rates,
and those in the UK to 24 to 28% tax rates.
The administrative cost involved in that would be
colossal. Look at it the other way round: if you have a Northern
Ireland-owned business which has a sales office in the UK, it
would then have exactly the same problem in reverse. It would
have to be preparing transfer pricing documentation to prove this.
It would be an impediment to trade across the Irish Sea between
Great Britain and Northern Ireland, there is absolutely no doubt
about that. You also have to have a political willingness in
this place to devolve taxraising powers to Northern Ireland,
and probably with regard not just to corporation tax but to other
taxes as well.
Q205 Chair: That
has happened in the sense of Scotland?
Richard Murphy:
It has happened in the sense of Scotland, and so far, let's be
honest, they haven't used it, although the Calman procedure is
there and the processes are being considered. I don't sense—and
I was in Edinburgh last week talking to some MSPs on this issue—that
there's a strong appetite for taking that risk, but maybe I'm
wrong.
Ian Paisley: It's a fascinating
argument, a really fascinating argument. What I can't reconcile
is that we had the chap from Invest Northern Ireland two weeks
ago, Jeremy Fitch, who is not a radical Thatcherite, by any means,
in terms of his approach—
Chair: What's wrong with
that?
Q206 Ian Paisley:
I'm tailoring my comments for the person answering the questions.
Is it as obvious as that? I'm sorry.
Jeremy made the point—I hope I'm quoting him
accurately—that when he goes round the boardrooms of Los
Angeles, looking for jobs and knocking on doors, and after the
investment conference that they had with Secretary of State Hillary
Clinton, the breakout session they had was about one thing and
one thing only: taxation. He says that that is the hook and unfortunately,
our competitors can go in and trump us on taxation.
Richard Murphy:
Do you honestly think—perhaps I shouldn't ask you a question,
but I'm sort of going to ask myself a rhetorical question now.
If, in a few weeks' time somebody is trying to decide whether
they want to go for the stability that Northern Ireland, backed
by the UK, can offer, or the instability that the Republic can
offer with regard to a population who are going to be seeing massive
burdens placed upon them and significant incentives to leave Ireland
because of the future tax burdens they're going to face, and where
the young are going to want to be leaving—I am astonished
at the number of articles there are now in the papers saying "It's
time to leave".
Q207 Ian Paisley:
You're an economist: you know that people don't look at it in
isolation, and I wouldn't look at it, and a business man wouldn't
look at it, in isolation. He'll look at the youth workforce, at
the employment skills, at a whole lot of bases. But if the other
arrow in the quiver just also happens to be, "By the way
it's the lowest tax regime in Europe and it also has all those
component parts—being part of the UK and everything else",
it's a pretty darn compelling argument.
Richard Murphy:
I'm not arguing that it isn't a good marketing tool; I've acknowledged
that. The point is that when you look behind that marketing tool
it's rather like the big notice on the front of the shop saying
"half price sale", then in the small print it says "on
selected items only for this afternoon". Now, the point
is that when you actually look behind what Northern Ireland could
offer in comparison with what the Republic can offer, because
Northern Ireland is going to remain for this purpose a region
of the UK, it has no chance of replicating the current tax offering
that the Republic has. So, yes, it would open more doors, but
when somebody comes down and does the detailed comparison of taxes,
they're going to say, "The Republic is still going to win
hands down". I say it in here: there is no chance of Northern
Ireland beating the Republic on tax; it isn't going to be possible,
so it's got to be something else.
Q208 Lady Hermon:
Thank you. You made reference a short time ago to having been
talking—I think it was last week—to some SMPs. Could
I just ask, as a matter of curiosity, are you invited at all to
brief the Finance Minister or the DETI Minister in the Assembly,
because ultimately this will be a decision for the Assembly to
make? I say that because this time last week we were taking
evidence from both the Finance Minister and the very able Minister
from DETI in Northern Ireland. When we asked whether there would
be duplication of those Customs and Revenue collection officers
they said no, they didn't want any duplication, but we've heard
quite clearly evidence to the contrary this afternoon—that
in fact, that would be an obligation on Northern Ireland. Are
you invited to brief Assembly Members?
Richard Murphy:
I'm not at the moment, but I'd be delighted to brief them if they
wish to have me go. I read their evidence from last week and
I thought that Mr Wilson's evidence was first-rate; I was impressed
by it. I had to go and read his background. I was impressed.
I'm not as familiar with his background as clearly some of you
are, and I was very impressed by what he had to say.
Peter Bunting:
I was being criticised in The Irish Times yesterday.
Chair: Gavin, this may
well be the last question, we will be voting in a few minutes.
Q209 Gavin Williamson:
I do very much apologise because I've missed some of the evidence
session, and I hope this doesn't go over what's already been discussed.
The Republic of Ireland has developed as an economy massively
over the last 20 years. If you go back four years ago, there
was talk about everyone in Ireland being so much wealthier than
virtually everyone in Germany. How much do you think is that
the true economy, as against just the fact that profits are maybe
being shipped in? We all know how money can be shifted around
the global economy. How much of that wealth was actually the true
wealth that's really been benefiting the Irish economy, and how
much of that true wealth is down to corporation tax reduced rates?
Richard Murphy:
I can give you a simple answer to this: look at the difference
between GDP growth and gross national product growth and they're
fundamentally different. GDP includes profit flow, and GNP will
exclude profit flows, and I suspect you'll find that they're substantially
different. The people in the Republic do not feel nearly as wealthy
as their GDP figures might suggest they are, and that is absolutely
consistently true of all the tax havens that I have studied around
the world, where you look at very high apparent GDPs: the Cayman
Islands, Jersey, Guernsey and so on. They are vastly higher than
the UK, and yet the local population do not see the benefit.
This is profit flow; this is not local earnings, and they are
fundamentally different.
Peter Bunting:
Just to finally answer that, in the previous six years back from
2008, both the Bank of Ireland and the Allied Irish Bank paid
their shareholders a dividend of 40% of the profits; we now realise
that it was spurious profits. So that's the answer.
Gavin Williamson: That
is very useful.
Chair: Okay; that's probably
a good place to finish. It's been a very lively debate, and I
think very useful; a very good evidence session. I thank you
very much for joining us. I think there's going to be a vote
again so we will suspend until 4.15.
Sitting suspended for a Division in the House.
On resuming—
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