Corporation Tax in Northern Ireland - Northern Ireland Affairs Committee Contents

Written evidence from CBI Northern Ireland

1.  The CBI welcomes the Northern Ireland Affairs Committee's Inquiry into Corporation Tax in Northern Ireland. The CBI has not undertaken any research into the impact of a lower corporation tax rate in Northern Ireland but we have welcomed the research and publication of 'The case for a reduced rate of corporation tax in Northern Ireland' produced by the Northern Ireland Economic Reform Group (NIERG).

2.  However the CBI Northern Ireland Council and various Committees have discussed the merits of changing corporate tax levels in Northern Ireland and debated a number of related issues. We have set out our responses to the Committee's questions below.

What effect will the reduction in the corporation tax (CT) rate on a UK wide basis announced in the June 2010 Budget have on the competiveness of the Northern Ireland economy?

3.  This will improve the competitiveness of the Northern Ireland economy, as it will in the rest of the UK. However it will not be transformational and will continue to leave Northern Ireland's CT rate significantly higher than the Republic of Ireland (ROI), which is considered our immediate competitor for Foreign Direct Investment (FDI). It will still leave Northern Ireland's investment proposition very much as a 'cost centre' while the ROI will continue to remain as a very attractive 'profit centre' investment location.

4.  The decision by the new Coalition government to reduce UK CT to 24% over the next few years gives recognition of the importance of CT rates to retaining and attracting investment. This is particularly true of multinational companies where tax planning forms an important part of their investment strategies.

What would be the benefits of equalizing the corporation tax rate in Northern Ireland with that of the Republic of Ireland?

5.  The result of lowering the CT rate to 12.5% will lead to a transformational step change in the economic performance of the Northern Ireland economy. The benefits will be:

  • a significant improvement in our international tax competitiveness - this would immediately benefit all companies paying the higher rate of CT, and would prove an attractive proposition to the c700 externally owned companies operating in Northern Ireland. Companies already operating in Northern Ireland would immediately have more profits available to invest in their businesses;
  • the ability to attract 'profit centre' FDI bringing a higher number and a higher quality (including various corporate functions) of jobs to Northern Ireland - both Belfast and Londonderry could expect to be the major beneficiaries from FDI within the tradeable services area. More profit centres will result in more local decision making, and potential opportunities for outsourcing R&D and hence benefit to our universities and colleges;
  • an immediate improvement in the competitiveness of existing businesses, both indigenous and FDI, making Northern Ireland a more attractive location to retain jobs and to encourage more investment - this could be particularly important in the medium term;
  • in addition to the direct employment which will be created by new FDI and further investment, perhaps in a range of corporate services within existing FDI, the benefits will extend to the supply chain and the development of high value accounting/legal services;
  • such a policy would have substantial economic spin-out benefits - with extensive job creation in local SMEs - some 30-40% of the additional jobs created are likely to be within the wider business community. Provided the necessary timely investment in relevant skills is undertaken there is no reason why Northern Ireland should not take a significant share of investment currently being attracted to the ROI - in the first seven months of 2010 the IDA has attracted 55 FDI projects promoting in excess of 4,100 jobs (information available from The IDA's FDI strategy "Horizon 2020" has investment targets for 105,000 new jobs between 2010 and 2014 (many of which will be in indigenous companies supplying goods and services) through 640 investments. The potential to attract significant FDI on the back of competitive tax rate, an available pool of skilled labour and an attractive cost base should not be underestimated;
  • for companies operating on an all-island basis it would remove distortions, lead to a streamlining of activities, and with Northern Ireland's more attractive cost base could lead to enhanced opportunities within the island; and
  • a low CT rate would be a major driver of improving Northern Ireland's productivity which continues to lag the rest of the UK.

What alternative measures could be introduced by the UK Government to make the NI economy more competitive?

6.  Clearly a low and competitive CT rate is a simple, headline grabbing incentive, which provides an immediate, easy to understand message to international investors. No other tax measure is likely to be as effective or as transformational for the economy. It will also be more difficult to assess the outcomes from other incentives, some which could be novel, as they may not exist in other regions. No other incentive is likely to have the same marketing impact.

7.  Other tax incentives could, and should be evaluated, especially those which are targeted at addressing strategic weaknesses or which will have a significant impact on investment, economic development and employment growth.

8.  CBI Northern Ireland has supported targeted tax measures including:

  • (a)  The introduction of 100% first year capital allowances for all businesses or perhaps 150% allowances - this is largely a timing issue providing cashflow benefits to companies.
  • (b)  The introduction of triple allowances (300%) for key identified expenditure within strategic areas, notably in research and development, training expenditure and marketing expenditure - these are three key areas where more investment and enhanced capabilities are required - these incentives might be particularly appealing to certain companies.
  • (c)  With employment creation now a major short/medium term priority it may be sensible to look at incentives which will encourage businesses to employ more staff, or which will attract high employment investment to Northern Ireland.

9.  We would welcome a more detailed evaluation of these incentives, and any others, which could make Northern Ireland a significantly more attractive location for investment over the next 10-15 years. For example Northern Ireland suffers a considerable competitive disadvantage when trying to encourage and attract television drama production into Northern Ireland as we do not have a tax incentive supporting this activity. While the UK government underpins the film industry with a globally attractive tax credit for film production, it does not support television drama in a similar fashion. This is in contrast to the Republic of Ireland (section 418 legislation), France, Canada and many parts of the United States of America. If Northern Ireland is to be declared an Enterprise Zone this could be the framework or justification for extending the film tax credit to television drama only within Northern Ireland.

Is a reduction in corporation tax the simplest and quickest way to make the NI economy more competitive, and how long would it be before Northern Ireland realised the benefits?

10.  There is a strong view in the business sector that a low and competitive CT rate for a sustained period would lead to a transformation in the economy over the medium/longer term. Existing policies, with a high reliance on government grants, has not produced the necessary transformation in the economy which continues to have a disproportionately large public sector and too small a private sector.

11.  The introduction of a low and competitive CT rate, even phased over a five year period, is the simplest and most attractive marketing tool available. Even the announcement of such a policy would deliver immediate media and marketing benefits and provide a "game-changing" environment. The benefits would commence within the first year, albeit modestly, from existing businesses, particularly externally owned companies who might have potential additional corporate services to locate in Northern Ireland. Within two to three years we expect a significant flow of new FDI, on the back of a new "profit centre" focused FDI strategy which would continue to build in the medium/longer term.

12.  The NIERG report assesses in detail the medium and longer term impacts - with an estimated 90,000 jobs over 20 years paying above average salaries, and importantly leading to a significant increase in other tax revenues (which will benefit the UK treasury) and reduce the net subvention to Northern Ireland.

13.  It is important to stress that the outcomes of such a major policy change will only be realised if there is certainty about the CT rate over a long period - this is essential in order to encourage investors to take long-term decisions. The Irish governments' commitment to maintaining its 12.5% CT rate despite massive cuts in public expenditure is a clear example of what is required.

What are the legal barriers to the introduction of different corporation tax rates on a regional basis within the UK?

14.  These appear to be well established following the Azores judgement in the European Court of Justice in 2006. To achieve a different CT rate in Northern Ireland from the rest of the UK will require three EU conditions to be met;

  • (a)  the region must have the political and administrative authority to introduce its own tax regime;
  • (b)  the national government must have no authority to influence such a decision; and
  • (c)  the region must bear the full fiscal consequences of introducing its own tax regime and in particular must not be compensated by the national authority for loss of tax revenue ie the NI block must take a hit on any tax loss which the UK Treasury will experience from introducing a lower CT rate.

15  We believe Scotland and probably Wales could introduce a lower corporate tax rate as they technically should be able to meet the three conditions outlined above. However certainly in the case of Scotland the affordability of reducing CT to around 12.5% is highly questionable due to the size of the current CT take, but this is clearly a question for the Scottish Parliament.

What would be the effect of reduced tax revenue in Northern Ireland?

16.  There will be a negative impact from the reduction in the NI block to meet the EU requirements set out above assuming that initially there is a reduction in CT collected in Northern Ireland. However as the NIERG point out the actual reduction in CT may be significantly lower than anticipated (and indeed experienced by the Republic of Ireland). In the medium/longer term with economic growth boosted the level of CT collected will increase. The most pessimistic view outlined by the NIERG report (and based on their modelling) is that it will take 20 years for CT revenues to fully recovery - the optimistic view would suggest that this period could be reduced perhaps to less than ten years.

17.   At this stage the precise "hit" is unknown with large variations in the estimates of what the Northern Ireland CT take actually is - especially at present as the economy emerges from the recession. The costs have been estimated to be in the order of £150 million to £300 million - though with the UK CT rate declining to 24%, and a decision to reduce the Northern Ireland CT rate to say 15% the actual "hit" might be somewhat lower than £150 million figure. The CBI would welcome the Committee undertaking a more accurate assessment of the CT tax take, and hence the potential cost of reducing the CT rate.

18.  A key issue will be to manage the transition - as a first step the CBI recommends that should the Executive/Assembly decide to reduce CT rate that it should be phased in over a four/five year period - the reduction in the NI Block will be easier to manage while the phasing should have little impact on attracting new FDI as it will be some years before new projects are up and running and making sufficient profits to avail of the lower CT rate.

19.  Additional efforts should be made to mitigate the impact further - can the reduction in the NI Block be deferred for some years? An alternative approach maybe to raise some bond finance to partly cover the shortfall which could be paid back over a 20-25 year period, perhaps linked to an increased rating take.

20.  With EU State Aid rules tightening and the ability to offer Selective Financial Assistance reducing considerably from 2013 part of the "cost" of this measure will be reflected in a lower annual budget for Invest NI.

What evidence is there from other countries that having different corporation tax rates on a regional basis is effective?

21.  There are limited examples of CT rates being varied on a regional basis. We are aware that the Basque region is Spain has had a lower CT rate than the rest of Spain - perhaps there should be no surprise to see that this is now one of the wealthiest regions in Spain.

22.  The Azores (which has been subject to considerably EU scrutiny as a result of its lower CT rate compared to Portugal) experienced considerable economic activity during the period of its low CT rate.

23.  The ROI's International Financial Services Centre (IFSC) was established with a specific low 10% CT rate (and exemption from rates for 10 years) in 1987 before the introduction of a general 12.5% rate across all businesses in 2003 - the IFSC was successfully created from nothing in a relatively short timeframe. Currently more than 430 international operations are approved to trade in the IFSC, while a further 700 managed entities are approved to carry on business under the IFSC programme. The centre is host to half of the world's top 50 banks and to half of the top 20 insurance companies.

What are the implications for other regions if there were different levels of corporation tax within the UK?

24.  A low and competitive CT rate will clearly make NI significantly more attractive and will lead to Northern Ireland achieving a higher percentage of FDI within the UK - while a doubling of FDI activity in Northern Ireland would have a significant impact here, the equivalent loss of that same FDI in GB would be of much lesser significance. As a lagging region this is surely what regional policy should be seeking to do. However as noted above Northern Ireland's main competitor for FDI is the ROI and it is this region which is likely to experience the most impact.

25.  If Northern Ireland is successful the net subvention to the Province will decline (as shown by the NIERG report), thus easing the burden or releasing more public expenditure for the rest of the UK. The modelling also indicates that the UK Treasury will benefit from other tax revenues, including income taxes, National Insurance Contributions, VAT etc.

26.  Clearly it will be important to avoid profit-sharing and company displacement - the low rate of CT tax would only apply to trading profits generated from companies conducting their businesses in Northern Ireland - all companies wishing to partake of the low CT rate would have to separately identify the profits arising within Northern Ireland.

20 September 2010

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