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.
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It will be interesting to see how many of the MPs’ and/or spouses become “employees” of the accountancy/law companies though; won’t it ?
[…] 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. […]
The proposition that a reduced corporation tax rate would, as a fiscal incentive, enhance the ability of NI to attract FDI, particularly in the face of its reduced ability to offer monetary incentives (following changes in EU State Aids limits) is, on the face of it, a compelling one.
On the other hand…
If we look hard at the Northern Ireland economy, we can see that, whilst the relatively small size of its private sector is a cause for concern, it is not the only one. The other – and possibly more significant problem – is that the number of firms trading solely or mainly within NI.
A fiscal incentive on corporation tax would be effective if it could target only FDI and those existing companies (often owned overseas) which are exporting goods and services, ideally in sectors chosen as beneficial in providing high growth and technology transfer. Providing a tax reduction to all companies, ranging from local banking services to bakeries, which exist solely or mainly within NI, is not going to provide the economic growth or jobs suggested. It is only going to reduce their tax bills.
The key factor here is INCREMENTAL growth and jobs – i.e. those which genuinely add growth to the NI economy by producing additional products or services for export.
It is likely that NI would find it difficult or impossible to so target a fiscal incentive.
As the majority of jobs in NI depend on local trading or the public sector, there would therefore be an immediate hit in the loss of local tax revenues from the majority of employers, whilst the benefit of incremental employment and salaries may be smaller and much longer in coming.
The reduction in the corporate tax rate in the RoI worked partly because, given the existing prior level of the economy there, they had pretty much nothing to lose by trying it. This is not the case currently in NI.
To make up the shortfall in corporation tax, which would be immediate, the NI Executive would have to either raise revenue from additional taxes or charges, or cut public services (on which a lot of employment in NI depends). There would therefore be an immediate and certain loss, against an uncertain and delayed gain.
And would the gain materialise? And would it offset the continuing loss?
First of all, I would have little faith that locally-based companies would use the tax saving to re-invest. As most are small and make little or no exports, there would be little possibility of increasing their business activities and, even if this did happen, it may only result in market displacement.Would increased profits be used to re-invest in new export activities or would it simply be retained?
FDI may get a boost, but the time lag would be several years at least. Also, the RoI example teaches us that, to be effective, any variation in corporation tax must also be accompanies by a raft of other measures. One obvious one is effective regulation to prevent “brassplating” – i.e. corporate tax residence in NI without generating substantive business activities.
In addition, it must be remembered that a strong fiscal incentive must also be accompanied by strong investment drivers, such as labour, skills and infrastructure. Low taxes are important only if companies are profitable and, if the investment factors aren’t right, they won’t be.
The headline tax rate is also not necessarily the most important factor. Frankfurter Allgemeine quotes French President Sarkozy claiming that companies pay just €8.20 in tax for every €100 invested in France thanks to generous write-off possibilities on its tax base whilst it is €11.90 for Ireland. On the other hand, Germany demands €22.90, yet it is by far the most successful economy in Europe.
So, should corporation tax be varied in NI, the result in the short-term will be that local companies will enjoy significant gains without any guarantee of increased employment or wealth. At the same time, there is likely to be either an increased tax burden for the rest of us leading to a fall in disposable income OR a fall in employment through cuts in public services. Either way, there is a net shrinkage in the economy and, incidentally, a consequent loss of business to those local firms benefiting from the tax cut.The potential upside will be years away and by no means guaranteed. And all this will be managed by people without experience of managing the effect of such a major tax change in a small regional economy.
I believe we need to think this through VERY carefully before someone presses the button.
I agree, entirely
Thanks for this