Ireland » Tax Research UK

Each new job created by corporation tax cuts in Northern Ireland will cost £61,000

May 262011

The Economic Advisory Group in Northern Ireland (a quango) has strongly endorsed the demand for a cut in the corporation tax in Northern Ireland to 12.5% to match that in the Republic of Ireland in a report issued today.

I have had a quick look at this report, it is very obvious that the economic logic that underpins it is completely bizarre.

Putting aside for a moment the obvious legal and constitutional problems that exist in having a separate tax rate in Northern Ireland if it is to be agreed to be legal by the European Union, and also putting aside the fact, which this group ignores, that the subsidy may not apply to any financial services company and nor may it apply to any company supplying intra-group services (and these are by far the most likely to be attracted by low tax rates) what is not disputed by anyone is that if such a rate is introduced then Northern Ireland must suffer a cut in its block grant from Westminster to exactly match the anticipated corporation tax revenue lost as a result of the reduction. This cut in the block grant would take place from day one on which the corporation tax cut took place. Of course, any potential benefit arising from the new jobs it is claimed it would create would take many years to recoup.

But, as the report makes clear if you read it carefully and do a little analysis, is that there is no are realistic prospect whatsoever of that sum being recouped. The report estimates that the lost block grant will be £272 million. How they come to guesstimate that is hard to know because HM Treasury and HM Revenue & Customs have said that they have no idea how much corporation tax is paid in Northern Ireland, but let’s assume they are right for a minute. This means that the people of Northern Ireland will have to see an immediate cuts in services when this corporation tax cut is introduced worth at least £272 million a year. They can only have those services back when sufficient additional taxes, a little bit being corporation tax but by far the majority being PAYE and National Insurance, are paid as a consequence of the new jobs created as a result of the introduction of this policy.

Let’s also assume that the EAG are right for a moment in predicting that 4,500 jobs will be created each year as a result of this cut in corporation tax even though research that I’ve undertaken, to be published shortly, shows that I can find no real link between employment rates and corporation tax rates across equivalent OECD states. But assuming they’re right nonetheless, that means that the cost of each job, assuming the 4,500 were created in the first year, would be over £61,000 each.

Now, average pay in Northern Ireland is about £22,000, at best, at present. It would be generous to assume that such a job contributes more than about £8,000 a year in total tax yield, even allowing for tax paid on profit by the employer. That means that in the first year of this policy, assuming it is completely effective the moment it is introduced, the loss per job created will be net £53,000. In the second year, assuming none of the jobs created in the first year did, of course, cease to exist then the cost per job would go down; they would only cost £45,000, because those from the first year would, by then, of course still be paying. So, again assuming that every job is retained, and that the program is instantly successful, after nearly 8 years the program might break even with regard to one particular year. But, to actually break even in terms of covering losses in the first seven years would require a program to last 15 years. And that ignores any cost of finance.

Being very polite, this makes absolutely no sense at all.

Worse than that, what this program means is that for the next 15 years the people of Northern Ireland will be net out of pocket whilst the business owners in Northern Ireland reap the reward, with absolutely no guarantee whatsoever that they will reinvest that reward in the creation of new jobs in Northern Ireland. There will be no obligation that they do so. As a consequence this is a hopeless use of public funding, the worse for the fact that it is a hopeless use of public funding which will have direct impact upon the most vulnerable people in Northern Ireland.

Of course Northern Ireland has an economic problem. I don’t deny it. But cutting taxes will not solve it for all these reasons, and many more besides, not least being the fact that cutting the headline rate will not actually make Northern Ireland attractive when compared to the Republic, which also has a much more generous tax base. The policy will, on that basis, fail in any case to deliver almost any new jobs.

There is good reason why investment should be made in the Northern Ireland economy, but that investment has to be by direct grant into new job creation programmes, particularly focused, I suggest, on the Green new Deal. That means an investment in new manufacturing, perhaps most especially focused upon tidal power which exploits the traditional skills of the engineering sector in Northern Ireland, to build real wealth, and not wealth in the pockets and bank accounts of those who own business in Northern Ireland.

In summary: it really is time that the politicians of Northern Ireland, and the politicians of Scotland to, open their eyes and realise that these proposals (because Scotland is suffering a similar suggestion from the SNP) are simply another exercise by a very small group in society seeking to capture tax revenues for their own private benefit when they are the least deserving of them.

Why cutting Northern Ireland’s corporate tax rate won’t work

Corporation Tax, Economics, Ireland, TUC 8 Responses »

May 242011

The Northern Ireland Select Committee of the House of Commons has suggested today that the corporate tax rate in Northern Ireland should be cut to 12.5% to match that of the Republic of Ireland. I wrote a report on this subject last year for the TUC and Irish Congress of Trade Unions. Entitled “Pot of Gold or Fool’s Gold” sets out my arguments in full. There are many of them. I will highlight three.

First, the chance that such a tax rate could be introduced in Northern Ireland without falling foul of EU law is remote in the extreme. And if it proved to be illegal the damage to the Northern Ireland economy as a result of the consequent uncertainty could be considerable.

Second, the Republic’s low tax offering is not just a low tax rate – it’s also a low tax base. The tax collected by any state is the tax base multiplied by the tax rate – and because both are low in the Republic then many companies operate there and pay little or no tax at all. This is something Northern Ireland could not emulate unless it were, in effect, to cede from the UK for tax purposes.

But doing that would have massive implications. First, the rest of the UK would then need to put up massive tax barriers to trade with Northern Ireland to prevent artificial tax abuse by companies really located in England, Scotland or Wales, That would be enormously harmful in terms of administrative burden to doing trade with Northern Ireland. And second, if it is assumed that the reduced tax rate will bring in increased taxes in Northern Ireland (and those proposing this idea seem to think that it will – although there is no evidence at all that the Laffer curve on which they base this idea actually exists) then that assumed increase in tax revenue has to be deducted from the subsidy now given to Northern Ireland so that it does not get a double dose of regional aid under EU law. The risk is if the assumption of increased tax is wrong – as I think not just likely but absolutely certain if the Republic’s experience is copied – then the funds available for public services in Northern Ireland will be cut severely. As a result this folly, promoted by the tax accountants of Northern Ireland for the benefit of their clients will impose real and lasting cost on ordinary people throughout Northern Ireland. And that’s a risk no one should take.

Which is why I and the trade union movement on both sides of the Irish Sea oppose this move.

MPs suggest cutting Northern Ireland’s corporate tax rate – in the face of all the evidence

Corporation Tax, Economics, Ireland, TUC 4 Responses »

May 242011

The House of Commons Northern Ireland has just announced that:

There is a convincing case for reducing the corporation tax rate in Northern Ireland, not least so it can better compete with the Republic of Ireland, concludes the Northern Ireland Affairs Committee in a report published today.

The Committee supports the principle of devolving to the Northern Ireland Executive the decision over whether or not to amend the rate of corporation tax, and believes this would assist the indigenous private sector to expand, innovate and employ more staff.

The Committee’s report uses 12.5% as a benchmark for the lower rate of corporation tax, but suggests that on the basis that the decision is devolved to the Northern Ireland executive it may, in due course, choose a lower rate.

I am especially annoyed that they say:

The evidence we received from businesses, trade unions, economists and politicians formed a convincing argument for a lower rate for Northern Ireland, which could help to unlock the potential of its private sector by boosting growth, innovation and exports.

Not telling the truth in your press release does not help your case: I wrote the trade union submission on this: it was vehemently opposed to this change, for very good reasons. The report I wrote for the TUC and Irish Congress of Trade Unions, entitled “Pot of Gold or Fool’s Gold” sets out my arguments in full. We were by no means the only opponents to this reform. That I know of no union supported it, so the press release is blatantly wrong.

But the Committee’s naivete suggests all the reasons why this reform will never happen. They say in their press release (no link as yet):

Low corporation tax is not a panacea for all Northern Ireland’s economic ills, warns the Committee.

They clearly listend to some of the evidence then. They continued:

[T]here are considerable implementation issues: direct comparisons with the Republic of Ireland and its experience with 12.5% are difficult because the UK and Irish tax systems are different.

They’re not just different, they might as well be from different from planets. Even after the UK has a territorial tax system (to be applied, I wonder to Northern Ireland alone in the case of an NI tax rate meaning dual tax rates for UK resident companies?) there are other problems, like Ireland’s lax enquiries regime, it’s disregard for transfer pricing issues, and lax approach to royalties and such matters. Northern Ireland cannot replicate these so it cannot beat the Republic on tax. Nor should it want to. So this policy will always fail.

Then there’s the need for:

the UK Government .. to satisfy the criteria laid down in the Azores judgment for the tax reduction to satisfy EU rules on state aids.

Constitutionally that looks nigh on impossible. Westminster specifically can’t decide on this issue and if it does then it will be illegal under EU law. And yet this report is clear indication that Westminster wants to decide on the issue – a faux pas if ever I saw one.

Moving on:

This means the decision to vary the rate must be devolved to Northern Ireland, the receipts for corporation tax raised in Northern Ireland would be kept in Northern Ireland, but at the same time the block grant would be reduced by the same amount as the initial corporation tax receipts.

The Committee were surprised to discover HM Treasury do not know how much corporation tax is raised in Northern Ireland. It is important that the Northern Ireland Executive has as much information as possible before deciding if, and how, it wishes to lower the rate, and at least a better idea of the amount of financial risk they are taking on. Furthermore, the benefits of lowering corporation tax must not be outweighed by the costs to businesses and HMRC, an issue also identified by previous Commissions into devolving corporation tax to Scotland and Wales.

So, the block grant has to be reduced but no one has idea by how much. That’s not going to work, is it? And even if tried the EU could challenge it – creating massive uncertainty.

And as the Charterd Institute of Tax have said – the additional costs to business of doing this will be massive – which is why they do not want it. All goods and services flowing to Northern Ireland under common ownerhsip will be subject to tranbsfer pricing rules. And the annti-avoiudance rules will be massive.

Then there’s the fact that under EU law this lower tax rate could not apply to finance companies or to companies supplying intra-group activities such as call centres, or group distribution, or the like. And it then becomes clear almost no new business could benefit.

So who would benefit? Well the accountants and lawyers will. And the Taxpayers’ Alliance must be laughing themselves silly this morning that they have conned these MPs. Will anyone else win? Not a chance. This is a nightmare of a policy and the MPs who have promoted it are foolish to do so.

Scotland needs to learn Ireland’s tax lesson

Ireland 7 Responses »

May 112011

It’s perverse that the SNP wants to cut Scotland’s corporation tax rate to match Ireland’s. As the Belfast Telegraph reports today:

Demands for higher corporation tax in the Republic won’t impact the future of Northern Ireland’s company tax rate.

Most experts reckon the Republic will stand firm in defending its notoriously low 12.5% tax rate despite calls from France and Germany for a level playing field.

The two countries have been putting pressure on the European Union to demand an increase in the Republic’s corporation tax rate in exchange for a decrease in the rate of interest Ireland pays for its bailout package of €85bn.

Who’s leading the defence of tax abuse? Why, our friends at KPMG:

Eamonn Donaghy, head of accounting firm KPMG’s tax practice in Belfast, said that the countries are “playing to the gallery”.

“Sarkozy and Merkel are playing to their home audiences,” he said.

“They think that if Ireland raises its corporation tax rate they will benefit. But there is a fatal flaw in their plan, if Ireland raises its corporation tax rate, the jobs will not go to the EU, they will not go to Germany or France, they will go to Geneva and Costa Rica, everyone will lose out.

Well, no: KPMG probably see opportunity in selling yet more tax abuse of an artificial nature if it succeeds. And the evidence is plain as well: no one moves real jobs to Geneva!

Someone talked some sense though:

Tax commentator Richard Murphy, who runs the website Tax Research UK and has previously argued that a cut in Northern Ireland’s tax rate would make it a tax haven, said France and Germany have the right idea.

“Germany and France are completely justified in their demands,” he said.

“For years the Republic received EU subsidies and stole the tax revenues of other member states in return. It’s completely fair that in exchange for EU aid the Republic stops its tax abuse.

“And that, of course, means there will be no reason for cutting tax rates in Northern Ireland.

“This is good news for the people of Northern Ireland as a result

It would be. Cutting corporation tax in Northern Ireland can only be done at cost of a massive reduction in the block grant for NI from the UK. And ordinary people will beat the price of that.

So, as ever, it’s KPMG at the forefront in promoting abuse of ordinary people to help fatten the already rich. It’s a story that’s going to be repeated, often. Until it’s stopped.

Scotland take note, and don’t be taken for a ride.

Osborne’s got it all wrong, as Ireland proves time after time

Conservatives, Economics, Ireland 6 Responses »

Apr 152011

As the Telegraph reports:

Moody’s has downgraded Ireland’s debt rating, citing “weaker economic growth prospects” and “uncertainty” created by EU solvency tests.

Ireland’s sovereign debt rating has been reduced two notches to Baa3 with the outlook negative and Moody’s warned harsher austerity measures may be needed.

CommentsIt said the country’s austerity plan is weakening government finances and it may suffer further as a results of interest rate increases by the European Central Bank.Ireland’s sovereign debt rating has been reduced two notches to Baa3 with the outlook negative and Moody’s warned harsher austerity measures may be needed to restore the economy.

There are numerous aspects of this story that are revealing.

First, the ratings agencies, despite being amongst the principle (and unprincipled) architects of the crash, are still consideed important although they are entirely unrepentant and unreformed. Their word still carries clout, and you have to ask why?

Second, as primary cheer leaders for the bond vigilantes it is clear that the rating agencies are entirely unimpressed by austerity measures, cutting, inflicting pain on populations who bore no responsibility for the debt they’re being forced to repay, and for bail outs. Ireland has done everything markets have demanded and that has failed it badly in the eyes of the market. We have to conclude the market is irrational, and rating agencies with it.

Third, given the IMF and EU bail outs, this is a massive slap in the face from the rating agencies for the IMF and EU – they’re saying they don’t believe they’ll stand by the deal.

Fourth, and alternatively, it says the whole narrative put forward by the right is wrong. It clearly has not saved Ireland. It clearly does not impress the markets. That’s a double whammy of failure.

What we need is a policy for growth – that’s what the markets want.

That’s a policy for spending to get people back to work.

With tax raised and benefits saved this is an incredibly cheap thing for governments to do right now. It isn’t when there’s full employment. But that’s just a dream at the moment. So spending our way out of recession is the way forward.

Selectively, of course.

On investment in new transport that’s green (and yes, that does include coaches, which I believe in).

And social housing.

And thermal efficiency.

And schools. And hospitals, Without either being burdened by the curse of PFI.

The private sector has no idea what to do with its money. It’s time for a confident public sector to take the lead and deliver the path to growth through innovative public spending.

Osborne’s got it all wrong in other words.

For a summary, read this.

Who is to blame for Ireland’s crisis? Easy: they need to sue KPMG, PWC and E&Y

Auditing, Big 4, Ireland 6 Responses »

Apr 012011

Ireland’s banks are bust.

They were foreseeably bust a long time ago. The failure is spectacular by any standards.

The accounts of Irish banks had to be wrong when signed off at the height of the boom. They were imprudent.

Who signed them off?

AIB – KPMG

Bank of Ireland – PWC

Anglo Irish Bank – Ernst & Young

Irish Nationwide – KPMG

Irish Life & Permanent – KPMG

Why are no writs being issued?

Let’s be clear – these banks failed to anticipate losses using reckless mark to market procedures that ensured they failed to comply with requirements that capital was preserved to protect creditors – the fundamental duty of all companies (over and above any duty to make a profit). The auditors were complicit in that in falling to identify the conflict between accounting requirements and company law – which in this case is the same for all practical purposes in Ireland as it is in the UK – where the same neglect took place, as the UK’s House of Lords made clear this week.

So sue, I say.

What have the Irish got to lose?

€24 billion is not it – so Ireland should brace itself for more – so long as International Accounting Standards are in use

Accounting, Economics, IASB, Ireland 1 Response »

Apr 012011

There’s widespread coverage of the fact that Ireland’s had a fifth go at estimating how but its banks are, and has upped the estimate to €70bn, a cool €24bn increase on the last time.

This time they say that’s it.

Well, I have a message for Ireland – I think you said that last time too. And you were wrong. And you may be again.

The fact is that this is just an exercise. And like all accounting exercises it only has meaning at a point in time. The loss is €70bn now – it could be more (and conceivably, but on current form improbably) less in the future.

Why more? Well, the more you say that Irish, and more generally, recently constructed real estate on a wider horizon is worthless – then the easier it is for markets to believe that’s true. And moral hazard comes into play – why bother to repay an Irish bank when it doesn’t expect you to do so?

That’s what’s happening, I’m sure. So, the losses just mount. It’s a vicious and endless circle. One way to stop it is to say that these banks are quite simply no longer viable, that they are in state control, and that as such the absurd accounting logic of International Financial Reporting Standard should no longer apply to them.

Now let’s talk about what this means. Mark to market accounting makes no sense in this environment when all that matters is future debt servicing. The rest is of no consequence.

So having to borrow to restore capital lost when actually the capital has not been lost – the property is still there and can be taken under the control of he bank and in at least a majority of cases can be turned to generate a cash flow for it is meaningless. That’s compounding the burden of the crisis. Of course these banks are bust on an asset basis – we all know that. But to force a nation to borrow to make that good is more than adding insult to injury. It’s providing other banks with the opportunity to lend money at profit to the ECB for them to lend on at high cost to Ireland so the bust banks can then repay the banks who lent to Ireland recklessly in the first place at cost to the Irish people. That’s a double burden on the Irish people – they lost the capital, now they’re losing the income and the reckless banks win both from them.

And all of that is done to comply with, firstly, an insane set of International Accounting Standards – rightly condemned by the House of lords this week for encouraging this mess in the frost place. Second, it’s done to meet banking regulations that assume a country has a functioning banking system. Well Ireland doesn’t enjoy that any more. It’s banks are bust. So let’s account for them on that basis.

That means that like it or not the loans to these banks can only be accounted for on the basis of the capacity of the Irish banks, and to limited degree, that nation to service them. And that means the only real measure of the worth of these loans is their cash generation ability. This is a long term view. It is one that might well suggest the loans have considerable worth – the value of real estate goes up, generally, in the long term. The markets may well recover from the current mess. It’s only International Accounting Standards that say we must only take the short term view – which is why they are fundamentally dangerous economic tools. In other words, different accounting would make Ireland’s plight look very different.

And actually different accounting would make the plight of the banks that lent to Ireland look very different if prudence dominated accounting thinking rather than the corrupt mark to market view of the International Accounting Standards Board. If a prudent view were taken then the loans to Ireland would have to be written down by the banks that lent them recklessly to ireland in the first place – because any prudent auditor (not that we have any in the Big 4 any more) would immediately see that Ireland has no capacity to service this debt – whatever the contracts say and however the markets are naively valuing the debt right now. So with a decent accounting system in place the problem would cease to be Ireland’s and would move on to be the problem of the banks that lent to Ireland – as it should be.

What does all this mean? Simply that Ireland is being screwed (there’s no better word for it) by poor accounting. And it can only get worse. Change the rules of accounting though and the horizon would look a lot better.

Two questions about Ireland

Ireland 6 Responses »

Mar 312011

The Guardian reports:

Ireland‘s embattled banks need to be bolstered by an extra €24bn (£21bn) – some €13bn of which needs to be used to prop up the troubled Allied Irish Banks (AIB).

It takes the total bill for repairing the hole in the banking sector caused by the bursting of the Irish property bubble to €70bn.

Two questions:

a) How long will it be before civil disobedience breaks out at the cost of this being imposed on ordinary people in Ireland, all to save banks elsewhere?

b) How long is it before Ireland defaults?

The answer is, of course (b) is not long after (a) but I see (a) as distinctly likely now. Why not? What have the Irish to lose any more? This debt cannot be repaid. It is €23,000 or thereabouts a head.

Driving the Getaway Car: Ireland, Tax and Development

Development, Ireland, Secrecy jurisdictions, Tax avoidance, Tax Havens Comments Off

Mar 312011

When it comes to tax policy, is Ireland a fine example or ahorrible warning?

This new report by Dr Sheila Killian of the University of Limerick argues that Ireland’s corporate tax regime can be abused by multinational companies (MNCs) engaged in tax evasion and illicit capital flows. Despite recent reforms to transfer pricing rules, significant weaknesses remain that provide MNCs with opportunities to create abusive international tax avoidance schemes to reduce tax payments in other countries. The result, according to Killian, is a policy incoherence which, among other things, goes against Irish commitments to ensure that government actions contribute to global development and do not undermine the objectives of Irish Aid.

This policy incoherence cuts to the heart of current thinking on development. As the report illustrates in the following flow chart, external debt burdens are closely linked to weak tax effort (the ratio of tax receipts to GDP) and increased dependence on external loans and aid programmes. The latter typically impose conditions which further undermine tax justice and ultimately contribute to fiscal and economic crisis. Tax competition lies at the very heart of this cycle.

Ireland has famously – and controversially – used its low corporate tax rate as a bait to attract foreign direct investment, and despite its current fiscal and economic crisis, strongly resists external pressures to remove some of the loopholes that allow the tax system to become a vehicle for complex tax cheating schemes. As we have blogged elsewhere, companies like Google are attracted to Dublin not so much by the 12.5 percent tax rate as the ability to use Ireland as a part of a more elaborate tax structure – in Google’s case employing the Double Irish (and Dutch Sandwich) techniques involving the routing of profits through Ireland and the Netherlands.

Despite being a relatively small player in both the European and global contexts, Ireland is able to exert a quite extraordinary influence on international tax policy. This influence derives from very active participation at a number of international fora, including the OECD, the UN Tax Committee and, of course, the European Union. This puts Ireland in a position of choosing between being a force for good in promoting enhanced international cooperation on tax matters, or a force for bad in blocking progress in that direction. In TJN’s experience, for example of observing at sessions of the UN Tax Committee, Irish representatives have in the past more generally aligned with blockers such as Switzerland, Liechtenstein and the United Kingdom.

The big question facing the incoming Irish government is whether – and how – to modify their corporate tax regime in ways consistent with the commitment to “work for a coherent approach to development across all Government Departments.” (Government of Ireland White Paper on Irish Aid, 2006). And can this be achieved without adversely affecting the country’s ability to attract inwards investment? Killian proposes 11 recommendations which, she argues, would strengthen policy coherence while also providing potential net future gains for the Irish economy. These measures include:

- Adjustment to the transfer pricing regime;

- Abolition of tax exemption on patent royalty income;

- Negotiation of tax treaties with a wider range of countries;

- Promoting enhanced tax information exchange, preferably on an automatic rather than on request model;

- Promoting a country by country financial reporting standard for MNCs.

Driving the Getaway Car is a timely and useful contribution to an urgently needed debate. The new Irish government faces tough choices on tax policies. The current situation is unsustainable and a new development strategy is urgently required. They can either opt for further tax competition, which we would argue is harmful to the interests of other countries and ultimately self-defeating (see Sheila Killian’s article in Tax Justice Focus here), or they can strike out in a direction that reduces harmful impacts on other countries and contributes to strengthening internal fiscal sustainability.

As Killian argues in this report, the current tax policy mix is not coherent with existing commitments to avoid causing harm to other countries. Change is necessary, but does the current government have the appetite to take on the vested corporate interests who find the current corporate tax regime, with all its gaps and loopholes, very much to their liking?

NB: Above reposted from Tax Justice Network blog with permission