2 Arguments for devolving corporation
tax
GAME CHANGER
16. In his 2010 Budget, the Chancellor announced
that the UK corporation tax rate would be reduced from 28%, in
1% increments, until it reached a rate of 24%. In his budget on
23 March 2011, he confirmed the end rate would be reduced by an
extra 1% to 23%. Similarly the small profits rate would be reduced
to 20%.[36] Advocates
of the reduction in corporation tax argue that low rates of business
taxes across the world have proved to be attractive to businesses,
and those countries with lower corporation tax are more prosperous
than those with higher corporation tax.[37]
Many witnesses welcomed the UK wide reduction but suggested it
would not be sufficient to make Northern Ireland itself more attractive
to investors.[38] One
respondent described the UK reduction as being "about as
useful as 'throwing snowballs into Hell'" because
of the proximity with the lower tax rate in the Republic of Ireland.[39]
17. One of the proposals to make Northern Ireland
more attractive to investors is a reduced rate of corporation
tax in Northern Ireland. One of the key drivers for this proposal
is the fact that the Republic of Ireland has a corporation tax
rate of 12.5%, and this has been credited for much of the growth
in the Irish economy in the decade before the banking crisis struck.
Those who support a reduction in corporation tax in Northern Ireland
commonly referred to it as being a 'game changer' because it could
have a dramatic impact and allow fair competition with the current
rate in the Republic.[40]
The Secretary of State argued:
When I have asked businesses where they would
be in 10 years if they had a lower corporation tax, comparable
to the Republic, time and again businesses have said they would
increase their turnover and often their workforce by 50%. Many,
perhaps equally many, say they would grow by 100%.[41]
He also claimed he had wide support among the business
community in Northern Ireland:
Look at this group of businesses that did the
jobs plan: CBI, Construction Employers Federation, the Centre
for Competitiveness, the Northern Ireland Chamber of Commerce,
IoD, Momentum, Northern Ireland Food and Drink, and the Northern
Ireland Independent Retail Trade Association. They all said emphatically
that the key thing they wanted was a low and competitive rate
of corporation tax.[42]
18. Many witnesses argued that while there had been
many reviews of what was wrong with the Northern Ireland economy,
all the previous prescriptions had not made a significant difference.
The Northern Ireland Economic Reform Group told us:
corporation tax is not just another policy instrument
for promoting economic development rather it is, without exaggeration,
the only means we know of comprehensively changing the economic
environment, within a timescale of years rather than decades.[43]
The Federation of Small Businesses echoed that call
for a reduction in tax:
The initial feedback at the moment from our members
is that 63% would be in favour of a lower corporation tax. [...]
We have to do something dramatic [...] to rebalance the economy
in Northern Ireland. As you know, we have been too reliant on
the public purse, and something radical has to be done to try
to rebalance this.[44]
19. Witnesses argued that, in addition to speeding
up economic growth in Northern Ireland, a reduction in corporation
tax would, after a while, increase revenue for the UK Exchequer,
reduce the subvention from the UK Exchequer to the Northern Ireland
Executive, and increase the number of people in well-paid, long-term,
sustainable jobs.[45]
We heard various estimates as to how many jobs would be created
if Northern Ireland were to move to a 12.5% rate, from 90,000
over 20 years,[46] to
64,000 new jobs over 20 years.[47]
The Federation of Small Businesses and the CBI suggested that
a reduction in corporation tax could be the incentive needed for
businesses to take on extra employees, but both admitted no commitments
could be given.[48] The
CBI said:
The evidence says that we will develop significant
jobs. Guarantee? No. There is no guarantee and it would be totally
misleading of me to sit here and say that I could guarantee you.
I couldn't guarantee you anything.[49]
20. Although there were exceptions, the vast majority
of witnesses, particularly those involved in business, who gave
evidence to the inquiry or whom we met in Northern Ireland, argued
for a reduction in the corporation tax rate in Northern Ireland.
Moreover, many of them said that previous policies had not had
the desired effect and a significant reduction in corporation
tax would be the dramatic change that business in Northern Ireland
needed.
ATTRACTING INVESTMENT TO NORTHERN
IRELAND
21. The Treasury consultation paper argued that a
competitive and stable tax system helps build confidence for business
to invest and expand:
A lower corporation tax rate would, on its own,
be likely to have a positive effect on local private sector investment
and foreign direct investment by increasing the return on capital
to investors. In addition, a lower corporation tax rate means
that businesses may have more post-tax profits available for internal
investment. Increased investment, other things being equal, typically
leads to increased growth and employment.[50]
Advocates of the reduction in corporation tax argued
that not only would it attract foreign investment, but, importantly,
it would promote Northern Ireland as a place where investors might
increase profits, rather than as a place to reduce costs.[51]
22. As we have noted earlier, the Northern Ireland
economy is dominated by small and medium sized enterprises (SMEs).
Ken Redpath, from the Federation of Small Businesses (FSB NI),
argued that while reducing corporation tax would attract foreign
direct investment, it would also be good for the indigenous SMEs:
The more multinationals you have, you expect
more trading to be done entirely within Northern Ireland, through
services, supply of goods, engineering, et cetera. There will
be a spin-off from that. [...] By encouraging larger companies,
it would feed down the chain to small businesses, stimulating
them to create profit, and maybe bringing more of them into the
corporation tax net than were there before.[52]
23. The Treasury's consultation paper, while accepting
that it is not possible to calculate the future benefits of a
corporation tax rate cut, asserts that it is possible to make
an estimate. It suggests that the impact of a reduction to 12.5%
could increase domestic investment by £50 to £65 million
in the first year rising to £110 million by the tenth year.
Additional foreign direct investment could be as much as £105
to £175 million in the first year, rising to £310 million
by the tenth year.[53]
MARKETING
24. Our witnesses argued that a large element of
the impact of a reduction in corporation tax would be as a clear
advertisement that Northern Ireland was a good place to do business.[54]
Jeremy Fitch, from Invest NI, said:
I look enviously to what the Republic of Ireland
has on the corporation tax side. If I am being asked whether it
would make a significant difference: definitely; absolutely it
would make a significant difference to promoting Northern Ireland
as an investment location.[55]
25. This is in a context where it has been found
that selling Northern Ireland to potential investors, regardless
of its existing advantages, was problematic. Roger Pollen, Head
of External Affairs for FSB NI, said the Executive had gone out
to sell Northern Ireland, listed the advantages such as the low
cost of doing business, the educated work force and access to
universities, but it was not enough to counter the reduced rate
of corporation tax in the Republic of Ireland.[56]
Jeremy Fitch, told us that the competition from the Republic was
stark and that "the target market that we can go after is
reduced because we are not competitive in that particular area
of tax. If companies are for that, we cannot compete".[57]
26. This aspect of competing with the Republic of
Ireland came up repeatedly. Nigel Smyth, from the CBI, said "We
know that the Republic of Ireland has got that and uses it as
a very powerful marketing tool".[58]
He suggested that a 12.5% rate in Northern Ireland, combined with
the lower costs that could be between 15% to 30% lower than in
the Republic of Ireland, would be very attractive.[59]
27. The Republic of Ireland has, it seems, clearly
demonstrated that a low rate of corporation tax is a useful marketing
tool. Northern Ireland might have other tax advantages but the
headline rate in the Republic of Ireland was what caught the interest,
as the Secretary of State told us:
There is a key marketing element in this. It
is just not the same to stomp around Boston and go to Cambridge
Massachusetts and say, "Look, come to Northern Ireland we
have x tax credit."[60]
28. However, other witnesses suggested that international
investors use more complex methods to choose investment locations.
Martin Fleetwood, PricewaterhouseCoopers, said:
Foreign direct investment has become a lot more
sophisticated in recent years; there is a lot more competition
in the foreign direct investment market. There are new entrants,
such as India, China and Puerto Rico, and that raises questions
in our minds about whether the experience of other countries,
such as the Republic of Ireland, can be replicated in Northern
Ireland using purely corporation tax as a single, some might say
blunt, tool.[61]
29. While a low headline corporation tax rate may
be a blunt instrument, this does not mean it is not effective,
and we heard evidence that without it potential investors do not
always show interest. John Whiting, Chartered Institute of Taxation
and the Office of Tax Simplification compared corporation tax
to the sign in the shop window drawing the overseas investor in,
only for the country to earn revenue through the other taxes that
the FDI generates. He pointed out that in Belgium and France they
collect much more via payroll taxes, which they balance by keeping
their corporation tax rates reasonable.[62]
30. Some of the newer Eastern European states have
also tried lower corporation tax rates to attract FDI,[63]
but witnesses noted that they need to find ways to compete, in
particular for US investment, against countries like the UK and
the Republic of Ireland which enjoy a number of inherent advantages,
such as a shared language and a good education system. Some witnesses
saw a danger that lowering corporation tax could become a race
to the bottom,[64] and
ultimately self-defeating.[65]
There are examples of countries which have lowered their tax burden
and increased their revenue as a result, although these relationships
are not simple or clear cut. For example, Mr Phillip Kermode,
from the Taxation and Customs Union Directorate General at the
EU Commission, admitted that he was unable to identify a clear
link between the overall level of taxation in a country and economic
growth.[66]
31. As our witnesses generally recognised, any business
considering investing in a new location will take into account
a range of factors, such as labour costs, skills availability,
infrastructure and communications, product and market settings
and the overall level of tax. It is possible to overestimate the
role of corporation tax as an investment location driver, particularly
in relation to an indigenous, small firms economy such as Northern
Ireland.[67] The economist
John Simpson suggested that there may be other ways of reducing
the total tax bill to business in Northern Ireland through more
targeted measures:
What we can say is that, if this was available,
who are the people likely to be doing R&D or innovation expenditure?
Would they be encouraged to do it in Northern Ireland if that
became a tax allowance? To answer this: yes, in both cases, this
would be worth having. I hypothesise, but only hypothesise [...]
that ultimately you could be offering incoming businesses a set
of circumstances in which, if they were doing the right things,
their tax liability might be very low indeed, if not zero.[68]
32. However, those who suggested alternative ways
of stimulating the Northern Ireland economy agreed that lower
corporation tax would be an improvement on the current situation.
For example, PricewaterhouseCoopers said:
[...] whilst we cannot endorse the enthusiasm
of some commentators for a rate reduction to Republic of Ireland
levels, such a reduction would certainly be of some benefit, albeit
one that is difficult to quantify. So it the option was to choose
between the status-quo or rate parity with the Republic, plainly
the latter would be preferable.[69]
Lessons from the Republic of Ireland
33. Before 2003, the Republic of Ireland had different
rates applying to different sectors. At one point the general
rate was 50%, with a preferential 10% rate for some manufacturing
and financial companies. The situation was unpopular with several
European countries and with the European Commission. The Republic
of Ireland was required to introduce a level rate[70]
and, in 2003, the Republic of Ireland decided to introduce a uniform
corporation tax rate of 12.5% on trading income and a rate of
25% to non-trading income.[71]
When the corporation tax rate was lowered, the share of total
tax due to corporation tax was reduced, but the total amount of
tax revenue was not reduced.[72]
34. During our meetings in Dublin we were told repeatedly
of the impact that the low rate had had on attracting FDI, and
we were commonly told in Northern Ireland that corporation tax
was a 'game changer' in reviving the economy in the Republic of
Ireland.[73] In addition,
the tenacity with which the Republic of Ireland has held onto
12.5% during its current economic difficulties, and in spite of
pressure from EU member states during the recent bail-out negotiations,
has been marked. The Government there clearly believes it had
been instrumental in keeping the Republic of Ireland afloat during
the present crisis. Victor Hewitt said:
I think we should note that were it not for the
FDI in the Republic at this moment in time, the country would
be in very severe difficulties, because it is the FDI through
its exports that is keeping the Irish economy afloat.[74]
Eamonn Donaghy referred to the companies that had
invested in the Republic of Ireland since the economic crisis
started,[75] and told
us:
The fact that the Irish Government has not changed
the corporation tax rate in the last 18 months I think is a very
clear indicator of how they would regard this as an important
tool to attract FDI. They have raised income tax, they have raised
VAT, they have raised all the other taxes, but they have steadfastly
retained corporation tax at 12.5%.[76]
35. The Treasury's consultation paper noted that
the level of FDI in Northern Ireland has been running at less
than a third of that in the Republic of Ireland. The Republic,
it is argued, also attracts 'higher quality' of FDI, and a priority
for Northern Ireland is "to expand these levels of foreign
investment in high wage sectors."[77]
Terence Brannigan, from the CBI NI, quoted research that suggested
that a 10% reduction in corporation tax would result in a 60%
increase in US investment, and that 74% of the FDI going into
the Republic comes from North America.[78]
Indeed, IDA Ireland, the Irish equivalent of Invest NI, has a
target of creating 105,000 high value added jobs by 2014.[79]
In comparison, Invest NI is currently aiming to hit a target for
this year of 5,500 jobs above the Northern Ireland private sector
median wage admitting "resource constraints are likely to
prevent this from being achievable".[80]
36. Several witnesses made the point that they wished
for a corporation tax rate that was competitive with the
Republic of Ireland. Roger Pollen, FSB NI, told us:
On our border, we have the Republic of Ireland,
which has a different tax regime, and that is probably why we're
feeling the pain of that much more acutely than mainland GB. It's
because, within a few miles, there's somebody who's operating
under a more beneficial tax regime. I think there's a reason for
that.[81]
37. Many witnesses to the Committee commented that
a low corporation tax rate will not be the silver bullet that
solves all Northern Ireland's economic ills. Similarly, corporation
tax was not the sole reason for the Republic's economic growth.
Evidence from PricewaterhouseCoopers, quoting Professor Brendan
Walsh, said:
During the 1980s, the period of the boom in US
FDI, there were no changes in the Irish tax system, indeed the
corporation tax rate actually increased in the 1980s, so it is
not possible to invoke it as an explanation for the timing of
the boom.[82]
Peter Bunting, ICTUNI, gave one view of the reasons
for the Republic of Ireland's economic success:
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.
[...]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 relation to the labour market, where wages were set for three
years in advance, so your cost structure was there.[83]
However, the argument is more complicated than simply
" the Republic of Ireland was successful attracting FDI,
Northern Ireland can be successful if it copies the Republic of
Ireland" and Peter Bunting pointed out that: "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".[84]
38. The Treasury's consultation paper is wary of
drawing direct comparisons with the experience of the Republic
of Ireland:
The Republic's corporation tax system differs
from the UK's in respects other than headline corporation tax
rates, which may result in companies paying less tax than the
headline rate implies. In addition to an entirely different system
of reliefs and allowances, significant differences between the
corporation tax systems in the UK and the Republic relate to rules
governing Controlled Foreign Companies, transfer pricing, thin
capitalisation and the taxation of dividends.
Because of differences in effective corporate
tax rates, and due to the large range of factors that determine
investment levels, it is necessary to be cautious in assuming
that a lower corporation tax rate would have the same effect in
Northern Ireland as it had in the Republic.[85]
David Gauke, the Exchequer Secretary, admitted it
was difficult to draw exact comparisons:
One has to look at the Republic of Ireland tax
system more broadly and not just the rate to fully understand
the impact of their tax system upon their economy. Unless you
replicate that exactly, one could say that there could be some
divergence between what happens in the Republic of Ireland and
Northern Ireland.[86]
39. Nevertheless, the experience of the Republic
of Ireland shows the value of corporation tax as a way to secure
the attention of potential investors and the experience of how
the IDA have marketed corporation tax and the Republic of Ireland
has been exceptional. However, comparisons with the experience
of corporation tax and the Republic of Ireland can be simplistic.
A reduction in corporation tax would not solve all the problems
of the Northern Ireland economy. In terms of attracting potential
foreign investment, Northern Ireland must be able to offer other
competitive advantages.
40. A low tax burden is an incentive for business
to make profits, invest and employ. A corporation tax rate competitive
with that in the Republic of Ireland would act as a clear sign
that Northern Ireland is open for business and help attract foreign
direct investment. A stimulated private sector would help generate
an entrepreneurial culture that would then encourage skilled,
talented and ambitious people to remain in Northern Ireland. It
should reduce the amount of money passed from GB taxpayers to
the public sector in Northern Ireland. It would increase the onus
on Northern Ireland politicians to take responsibility for tax
raising as well as spending. And, by creating employment and prosperity,
it would help to cement the peace.
41. We welcome the publication of the Treasury's
consultation paper and the debate that is taking place as to how
best to support the Northern Ireland economy. In principle, we
support the devolution of the power to vary corporation tax to
the Northern Ireland Executive.[87]
However, we understand that there will be consequences associated
with doing this and recognise that there are concerns that need
to be addressed before this can take place.
36 www.hm-treasury.gov.uk/2011budget.htm Back
37
Q 81. See also Q 260 Back
38
Ev 192. A survey among the Northern Ireland branch of the Chartered
Institute of Taxation found 46% of its members thought the UK
wide reduction would have little or no impact in Northern Ireland. Back
39
Ev w5 Back
40
Q 301. In our Report, a reduced corporation tax rate should be
read as 12.5% unless otherwise stated. Back
41
Q 35 [Responsibilities of the Secretary of State for Northern
Ireland] Back
42
Q 81 Back
43
Ev 207 Back
44
Q 296 Back
45
Q 15 Back
46
Economic Reform Group, The Case for a Reduced Rate of Corporation
Tax in Northern Ireland, May 2010 Back
47
Q 39 Back
48
Q 301 Back
49
Q 110 Back
50
HM Treasury, Rebalancing the Northern Ireland economy, para 4.5 Back
51
Q 3 Back
52
Qq 314 and 316. See also Ev w1 Back
53
£300m gamble ... or a golden opportunity? Belfast Telegraph,
25 March 2011 Back
54
See Q 275 Back
55
Q 33. See also Q 69 Back
56
Q 334 Back
57
Q 39 Back
58
Q 88 Back
59
Q 88. See also Q 258 [NYSE] and Q 71 [Martin Fleetwood] Back
60
Q 78 Back
61
Q 59 Back
62
Q 71 Back
63
Q 59 and Q 21 Back
64
Ev 202 Back
65
Q 3 Back
66
Q 394 Back
67
PricewaterhouseCoopers, Corporation Tax Game Changer or Game Over,
January 2011 Back
68
Q 288 Back
69
Ev 202 Back
70
For more information on corporation tax and Ireland, see Brendan
Walsh, 2000, The Role of Tax Policy in Ireland's Economic Renaissance,
Canadian Tax Journal, v.48, p.658-673. Back
71
IDA Ireland, 2010, Guide to Tax in Ireland, Page 4. Trading income
applies to that earned from economic activity, e.g. buying and
selling goods with a view to making a profit, or providing services.
Non-trading income is passive in nature, e.g. arising from investments
in money, securities and property. Back
72
Q 91 Back
73
Q 301 Back
74
Q 22 Back
75
See www.idaireland.com/news-media/featured-news/ Back
76
Q 3 Back
77
HM Treasury, Rebalancing the Northern Ireland economy, para 2.9 Back
78
Q 108 Back
79
IDA Ireland, March 2010, Horizon 2020: IDA Ireland Strategy, page
2. The target is to create 105,000 high value jobs between 2010
and 2014 Back
80
Ev 212 Back
81
Q 323 Back
82
Walsh, Brendan, Taxation and Foreign Direct Investment in Ireland,
in Grubel, H G (Ed.), Tax Reform in Canada: Our Path to Greater
Prosperity, 2003, Vancouver, 207-230. Back
83
Q 175 Back
84
Q 175 Back
85
HM Treasury, Rebalancing the Northern Ireland economy, paras 4.10-4.11 Back
86
Q 9 [Rebalancing the Northern Ireland economy] Back
87
In this Report we have used 12.5% as a benchmark. On the basis
that the decision is devolved to the Northern Ireland Executive
they may, in due course, choose a lower rate. Back
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