Tax debate update
As a fascinating battle rages on whether Northern Ireland should push for a lower rate of corporation tax, Gary McDonald looks at the pros and cons.
Few fiscal issues have grasped the business community’s attention over the last year as much as whether Northern Ireland, if permitted by Treasury, should opt for setting its own rate of corporation tax.
It was the introduction of a 12.5 per cent rate of the business tax by the Irish Republic which was undeniably the catalyst for the birth and ultimate roar of the Celtic Tiger.
The slashed corporation tax in Ireland was more successful than its proponents could have ever imagined, co-inciding with a huge investment wave from computer and pharmaceutical industries in the 1990s in the US.
And with a burgeoning young educated work force, the Republic was ideally placed to benefit from the lure of the lower rate, which gave it European competitive advantage.
For nearly two decades the North has looked on enviously as its nearest neighbour landed investment after lucrative investment on the back of its advantageous corporation tax. It was Ray MacSharry, the Fianna Fáil Finance Minister, who asserted in 1987 that “no financial weapon was more important than tax in attracting foreign investment”.
And despite the tumultuous last 12 months for the Republic’s beleaguered economy, when the now departed Fianna Fáil government was forced to go to cap- in-hand to its European cousins for an €85 billion bail-out, and then introduced the most swingeing austerity measures in the state’s history, it clung on to its corporation tax rate when all around it was crumbling.
No wonder the cries of “we want some of that” have echoed round boardrooms and the corridors of power at Stormont.
So, anyone for 12.5 per cent in the North? Or is the mooted cost of £280 million (that’s been calculated by working out what the Exchequer would lose through existing local businesses benefiting from lower tax bills) a gamble too far?
‘No guarantees’
PricewaterhouseCoopers really put the cat among the pigeons when it published a report claiming that there can be no guarantees that a low corporation tax in Northern Ireland would lead to the creation of a single job or lead to any significant increase in FDI.
It also concluded that corporation tax as the be all and end all of FDI in the Republic was “not wholly convincing”, and that while the 12.5 per cent rate had undoubtedly contributed to increased investment and re-investment and may even now be a totemic or iconic part of the Republic’s branding and self-identity within the EU, there is a considerable body of evidence that corporation tax is only one of a number of complex and interacting tax drivers that include the simplicity of the tax system, the number of taxes levied and bilateral arrangements concerning taxation of foreign income between host and home countries.
“Looking worldwide, a review of the tax regimes of 182 countries plainly shows that regions with low – or no – corporation tax do not necessarily attract FDI; nor are they ‘low-tax’ regimes as many have very high ‘other’ business taxes, with complex and business-unfriendly collection and regulatory tax regimes,” PwC said.
However, it added: “While there are reasons not to make Northern Ireland’s corporation tax rate alone the basis for a new economic development strategy, there is a compelling argument for giving the Executive the power to do it.”
Business backing
But while there are obvious misgivings not just by the PwC authors but by unions, it hasn’t stopped business leaders rallying to the 12.5 per cent cause.
A coalition of seven leading business organisations has issued an open letter to all 108 MLAs, 18 Northern Ireland MPs and Secretary of State Owen Paterson, demanding that the right to set business taxation is devolved to the Stormont Assembly.
The groups behind the campaign are the CBI, Institute of Directors, Northern Ireland Chamber of Commerce, Centre for Competitiveness, Northern Ireland Independent Retail Trade Association, Northern Ireland Food and Drink Association, and Momentum.
Joanne Stuart from the IoD claimed that foreign direct investment in the Republic has created 140,000 jobs that supports another 100,000, and that two-thirds of the country’s €160 billion in exports is generated through those firms.
The Northern Ireland Economic Reform Group (NIERG) has also weighed in to the argument, claiming a key benefit to the lower tax would be the creation of up to 90,000 well-paid jobs over a 20-year period.
“The evidence from the Republic is irrefutable that the ability to adopt a low corporation tax rate would put a powerful new economic tool at Northern Ireland’s disposal. It is vital that we equip ourselves with a proven means to boost economic growth,” NIERG said.
Its membership includes luminaries such as Eamonn Donaghy from KPMG; Neil Gibson, Oxford Economics; Dr Graham Gudgin, Centre for Business Research, University of Cambridge; Michael Hall, Ernst and Young; Dr Victor Hewitt,
Director of ERINI; Sir George Quigley, Chairman of Bombardier-Shorts; and University of Ulster economist Michael Smyth.
Trade barrier?
But again came more cold water. This time Richard Murphy of Tax Research UK said the tax move would not guarantee a single new job, and claims that devolving corporation tax powers to the North would cost £300 million from its Westminster block grant.
“The truth is the Irish Republic’s tax system is fundamentally different from the UK. There is absolutely no way on Earth that Northern Ireland could reproduce what the Republic offers,” he said. “If you’re going to spend £300 million on attracting businesses into Northern Ireland, this has to be the worst way possible.”
Murphy, an adviser to the Tax Justice Network and the TUC on taxation issues, said he believed it was “extremely unlikely” that corporation tax would be devolved to Northern Ireland due to European Union rules, and if it did happen it would put a barrier to trade between Northern Ireland and Britain.
Unquestionably lower corporation tax has been a vital draw for FDI in the Irish Republic and a key component, a cornerstone, of its industrial policy.
The Economist, no less, also wrote recently that it would be “madness” for Ireland to abandon its low corporation tax rate.
One area that hasn’t been full debated in Northern Ireland just yet is that, in the event that corporation tax is cut, where does it leave the present policy of supporting overseas investment with selective financial assistance?
Perhaps that’s an argument for a little bit further down the road.
