Corporation Tax - Northern Ireland Affairs Committee Contents

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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