Is a regional corporate tax rate achieveable and practicable?

Mick’s thread yesterday highlighted how the twin track nature of the UK’s economic development. In the present talks the issue of boosting the economy by introducing a lower regional corporate tax rate for Northern Ireland has been suggested but rejected by government. However, what is good for NI could be equally so for other under-performing parts of the UK. Should the proposals be broadened to include other regions? Does expanding it out make it more sellable/achieveable as a policy goal? It would be hard for Northern MP’s to argue against and would the Tories want to engage in a public fight against a tax cut for business? What are the practical barriers to introducing regional corporate tax rates within a unitary state? Would it just end up as book movements and more lucrative work for tax lawyers? In terms of the global economy, the Republic of Ireland’s experience is that it leads to real growth and some book movements. Would it produce the same results within a country?

  • Crataegus

    It would be better if introduced across the entire country the only problem of regions within a country is business relocating from say West Midlands to Wales so no net gain.

    However on second thoughts there are all sorts of intriguing possibilities. Variable tax rates could be used to encourage more even growth patterns. It could take the development pressure of the South East by leaving it the sole area with a higher rate! It’s an interesting idea and would need thought through properly, but my instinct is go for it. Variable tax levels as a tool of regional development why stop at corporate tax?

  • Brian Boru

    There is just no way any UK govt would agree to this. You make your bed you lie in it! 🙂

  • smcgiff

    ‘Would it produce the same results within a country?’

    It would if allowed, but there’s no chance. Especially a region like NI where the UK is only now starting to increase taxes (local) to UK levels.

  • IJP

    All very well put, Fair Deal.

    I really wish people would stop this simplistic claptrap about 12% corporate tax rates.

    a. It’s not allowed to happen.
    b. Even if it was, it wouldn’t.
    c. Even if it did, it’d make minimal difference.

    It is quite clear that such differentials are not permitted within single EU member states.

    In any case, they are impractical. If you did it for NI, the case for Wales would be unanswerable. If you did it for Cardiff, the case for Bristol would be unanswerable. And so on.

    But most of all, NI’s difficulties, like the Republic’s relative success, are about much more than corporate tax rates. Fundamental further hindrances include: a) political instability; b) inward-looking people; c) poor education (stuff what happens at age 11, what the hell happens at age 16, 18, 22?); d) interfering enterprise agencies; e) public-sector ethos; f) lack of venture capital; g) the ridiculous ideas that most entrepreneurs come from the graduate stream at age 21-22; h) I don’t think I need to go on…

    But Crat is basically right. Targeted assistance for specific areas might be interesting. And generally the best way to do that is to get the tick-box bureaucrats out of the way and let the entrepreneurs and venture capitalists get on with it…

  • Anna Dale

    “What are the practical barriers to introducing regional corporate tax rates within a unitary state?”

    I’m no economist (or constitutional lawyer) but to me this makes more sense in the long-term than giving subsidies or tax-breaks to larger businesses to move into the areas concerned.

    The experience of Slovakia (prior to the recent change of government) proved that a lower corporation tax will not only help *indigenous* businesses, but also encourage the larger foreign companies to stay on after the original “set-up” subsidies have run out; if it can work on a national basis then I can’t see why it couldn’t also on a regional one.

  • smcgiff

    ‘if it can work on a national basis then I can’t see why it couldn’t also on a regional one.’

    It would be easier to introduce on a national level than within a regional level. And, on a national level, a country like the UK would find it very hard to switch overnight to low corp tax rates. Unless, that is, they significantly raised Income tax rates. Any takers?

  • George

    The UK was the largest recipient of Foreign Direct Investment in the world in 2004 even with the 30 per cent corporate tax rate.

    88 billion pounds sterling flowed in but just 155 million made its way to Northern Ireland.

    Reducing the corporate tax rate on its own won’t fix a thing.

    People have to want to invest there so other things must change too.

  • smcgiff

    ’88 billion pounds sterling flowed in but just 155 million made its way to Northern Ireland.’

    Of the 155, any idea of how much came from the ROI?

  • George

    No idea smcgiff,
    I read it in an article to do with Invest NI and the number of projects it attracted.

    But what the figures do show is that with that level of FDI there is no reason for the UK government to change things just because some politicians in NI, who refuse to even contemplate running their own affairs and already cost a packet, think it would make their lives a little easier.

  • smcgiff

    ‘who refuse to even contemplate running their own affairs and already cost a packet, think it would make their lives a little easier.’

    Politics 101

    I. Rates rises

    Complain = Possibility of increase in votes. Don’t complain = Retire now.

  • Crataegus

    IJP

    I agree On the matter of

    get the tick-box bureaucrats out of the way

    This is slightly of topic but may amuse. I was talking to an Architect earlier, he gave me a few examples of the Planning process. One which I couldn’t believe was for a kennel for a few dogs for working class blokes who live in terrace houses in Belfast, their hobby. They apparently bought an acre up behind Divis somewhere and decided to do the right thing and apply for planning permission. We must bear in mind the comparison between this dog house and farm sheds for cattle and that it is located in the back end of no where up a dead end with the nearest farm dwelling well away. The planning Office have asked for an Noise Report!!!! You think they were proposing to keep wolves or were using it as a recording studio. How are half a dozen dogs going to cause more noise than a shed full of cattle? Why, one has to ask do they need permission in the first place? Is this a sensible way to allocate the time of planners, architects etc. In my opinion it highlights an insanity that is at the heart of the Planning process. What happened to common sense?

    The local planning office is directly responsible for over 5 million that I know of being spent abroad rather than here last year alone. That’s what I know of and I am sure that the figure over the entire NI is frightening. They are a major brake in development. On occasion it is possible to build an office block or hotel in the East before you get planning permission here, overall turn around time is much quicker. Now I am definitely not in favour of unrestricted planning but someone really does need to have a serious look at the process and the hierarchy of consultations and ask what is the point in much of this and can it be done more efficiently. The inconsistencies and lack of clarity really does need to be sorted out and is unnecessary. In my opinion Development Control and much of Development Plan should be given to the Councils to run because by comparison the Council run Building Control Departments are generally excellent.

    I am sure many of you can think of other Departments that are often of dubious benefit.

    So the problem is not solely tax levels.

  • IJP

    Good points as usual George – though any references?

    Certainly brightened my lunchtime, Crat… and absolutely ludicrous that I left planning off my list above…

  • Whether or not varying tax rates within regions of the UK are actually feasible, I really don’t know. I wouldn’t like to be the Minister responsibole for telling Teeside they couldn’t have a reduction in the tax rate when NI has had one. While he economics might be appealing, the politics of it aren’t.

    However, this cannot be taken in isolation. As the thread has developed othe sdhave recognised it’s not the one issue that makes a difference but the entire package: our history, our lack of entrepreneurship, our dependence on the state sector, our insularity (as a result of our recent history,)our location on the outer fringes of Europe, our poor transport system plus the fact that if the UK is not bad enough in itself, we in NI are incredibly overgoverned and have no political accountability. The planning story above is the tip of the iceberg – don’t get me started on the horror stories of trying to get practical and timely support from INI. As for the banks, does entrepreneurship appear in their dictionary?

    We need to get off our backsides and let the entrepreneurs do their bit to bring prosperity to NI. By all means we should examine the possibility ofc orprotae tax relief but do not ignore the enormous political problems associated and lets not blame all our economic woes on that alone.

    Rememeber how we were told we were going to hell in a handcart unless we joined the Euro? Same with this tax.

  • Brian Boru

    “I’m no economist (or constitutional lawyer) but to me this makes more sense in the long-term than giving subsidies or tax-breaks to larger businesses to move into the areas concerned.

    The experience of Slovakia (prior to the recent change of government) proved that a lower corporation tax will not only help *indigenous* businesses, but also encourage the larger foreign companies to stay on after the original “set-up” subsidies have run out; if it can work on a national basis then I can’t see why it couldn’t also on a regional one.”

    Accept that it wouldn’t work politically. It wouldn’t work politically because English, Scottish and Welsh MPs won’t allow NI to have a competitive advantage over them when it comes to attracting multinationals. And their voters wouldn’t be best pleased if they allowed it. Name me one country which has separate regional corporate-tax rates Anna. I can think of none. As I said – you made your bed (the UK) so you can lie in it!

    “Rememeber how we were told we were going to hell in a handcart unless we joined the Euro? Same with this tax.”

    Unemployment is rising in the UK isn’t it?

  • fair_deal

    All

    Part of the debate has focused on whether NI alone could get such a break. This ignores the specific suggestion in the thread that:

    “Should the proposals be broadened to include other regions? Does expanding it out make it more sellable/achieveable as a policy goal? It would be hard for Northern MP’s to argue against and would the Tories want to engage in a public fight against a tax cut for business?”

    Any comments?

  • Brian Boru

    Fair_Deal, that would erode any advantage for NI wouldn’t it vis a vis other UK regions?

  • BB

    “Unemployment is rising in the UK isn’t it?”

    Yes, has recently, but don’t think that down to the Euro. Note unemployment higher in traditional economic power houses of Europe. We were promised the Apocalypse by some when Euro came but that was a while ago now. We’ve not seen the flight of capital nor massive withdrawing of industry predicted. No crowing there, just thankful. Have to look to our own economic cycle and government policies for performance of economy.

  • Niall Fitzpatrick

    Switzerland has regional corporate tax rates and it works fairly well for them Brian. I think canton Zug has the lowest and is also (surprise surprise) also the richest. Zug is in a similar situation to ireland in terms of its size vis a vis the rest Switzerland (pop 25,000) or 0.3% of Swiss population.

  • fair_deal

    BB

    ” any advantage for NI wouldn’t it vis a vis other UK regions?”

    1. It is a global economy that we are competing in.
    2. No regional rate = no potential benefit, a broader regional rate initiative = some potential benefit.

  • Dread Cthulhu

    Brian Boru: “Name me one country which has separate regional corporate-tax rates Anna. I can think of none. As I said – you made your bed (the UK) so you can lie in it! ”

    The United States has state level tax schemes, which amount to the same thing. Michigan, for example, has chosen to emulate the example of France, with personal income taxes, corporate income taxes, state sales tax and a VAT tax, making it expensive to even lose money in that state. Most states have one, maybe two of the first three on that list. Economically competative states usually have one. As they say in Wyoming, “Michigan has been very good to us.”

  • inuit_goddess

    It’s an interesting idea, but two immediate problems come to mind:

    i) The conditions here in NI and other depressed UK regions are very different to those existing in the RoI before the celtic tiger – corporates are focused much more on investing in the emerging economies of SE asia and Eastern Europe, where labour is significantly cheaper. Low corp tax alone is unlikely to compensate.

    ii) Wouldn’t this undermine the fiscal fabric of the UK – in other words, mightnt we have to compensate the central government for the difference between the corp tax rate here and the one in SE england? That might amount to a significant chunk of the block grant – so we might lose on one hand what we gain with the other. Or maybe it could be funded through use of the ‘peace dividend’?

    Also, what’s to stop companies in the Southeast / London where the corp tax rate is still high from merely decamping across the Northumbrian border, or across to NI – good for us and the Northumbrians, but not for the SE of England.

    Perhaps something along the lines of designating Special Investment Areas (a bit like Dublin’s IFSC used to be) with lower tax for investment in those areas?

    But basically low corp tax is not a magic bullet, we’re not going to be able to replicate the Celtic tiger because global economic conditions have simply changed too much.

  • Brian Boru

    “Yes, has recently, but don’t think that down to the Euro. Note unemployment higher in traditional economic power houses of Europe. We were promised the Apocalypse by some when Euro came but that was a while ago now. We’ve not seen the flight of capital nor massive withdrawing of industry predicted. No crowing there, just thankful. Have to look to our own economic cycle and government policies for performance of economy.”

    The high unemployment in Germany, France and Italy is not mirrored in the Republic (4.4%), Austria (5%), Luxembourg (4.6%) or Netherlands (3.8%, proving that the outdated ‘social model’ is the real reason the former are doing badly, not the Euro. They would be in a far worse position without the Euro, and even in France and Germany, unemployment is on a downward trend. The long-term trends favour the concept of economic growth and falling-unemployment when a country joins the Euro, which the UK should do. NI should be allowed to join the Euro.

  • Dread Cthulhu

    Brian Boru: “NI should be allowed to join the Euro. ”

    That would have the same impact as putting racing stripes on a Yugo.

  • aquifer

    Low company tax would change things radically, but all is not lost without it.

    If we cannot get the tax rate, how about creating super-slick transport and teledata connections to ROI, with trade fairs so ROI companies can source their goods and services here. Local companies doubling their turnover and profit margins could be as good as low corporation tax.

    Is there anything to stop NI investors starting up ROI companies to get the lower rate, but purchasing goods and services in NI to make the money?

    Some sectors such as R&D services could provide a big economic boost without generating big profits to tax, and the spinoffs could go down the road if they had lots of money to make.

    Local companies are already noticing that buyers in the Republic are happy to pay good prices to get past their own supply constraints.

  • John East Belfast

    Corporate Taxes are all about big companies and FDI.

    They worked in the ROI because they attracted the ICT & Pharmaceutical manufacturing jobs. However as every international accountant knows if you bring the money home then you will pay home taxes anyway. (there are moves in the US to make this happen whether the money comes home or not) Therefore the key was to leave it there which meant the ROI got a double dunk – ie they got the white collar R&D jobs as well.

    In NI we already have the effectively small company rate of 19% on profits up to around £350k – therefore for the vast bulk of NI Ltd companies they pay a rate not far off the Republic anyway.
    If this was reduced to 13% the notion that these extra profits would be ploughed back into the business is IMHO unfounded.
    It would be taken out as extra Bonus/Dividend and consumed by the local shareholders – in that respect HMRC would get their cut anyhow.

    The Business Property Relief Incentive, where if you build a business from scratch and sell it you will only pay 10% capital gains tax, is the real driver for the local entrepreuner.

    Therefore what about the big FDI ? – there would undoubtedly be a case.
    The big issue is where would they get their labour considering NI is already operating a close to full employment anyway.
    One would have to assume that this would be the case for slashing our public sector.

    Nobody wants to pay more tax but our problem is we are not paying enough tax to cover our expenditure therefore it is a bit rich to ask for more.
    Therefore the approach to the Treasury should be one one of what can we give in return.

    I think I once read that the NI Corporate Tax take is about £120m per annum. Meanwhile INI ‘s budget is about £240m.

    I would say to the Treasurey give us 0% Corporate Tax Rate and scrap most of everything INI do with the exception of FDI. At the sametime agree a plan of Public Sector reduction – the several hundred jobs in INI would be as start.

    ie you have to offer something to get something back

    Would it be acceptable to other UK regions ?
    I think if the economic case was put that the Net cash flow to NI would be a reduction then I believe a case could be made. Meanwhile our Sea border would draw the sting of any major corporates making an easy transition out of their existing location.

    I am at two minds about it though as I believe what NI needs is a major dose of nimble, innovative and entrepreunarial companies – large FDIs might be a catalyst for this but I am not so sure.

    NI had an experience with the big companies in the 60s & 70s – when the winds of change come they will pack up and go to wherever the numbers add up.
    You want business run by people who live and make their homes here and who are in it for the long haul.

    By and large we all pay too much tax but IMHO the big corporates in the ROI dont pay their share.

  • George

    IJP,
    The 88 billion (165 billion dollars) is the OECD figure for the UK for 2005.

    http://www.oecd.org/document/39/0,2340,en_2649_201185_37011943_1_1_1_1,00.html

    The 155 million is the money attracted by Invest NI in the last tax year. I read that in the Irish Times. I found the same figure in this article which points out there was another 205 million added in follow-on committments, whatever that means.

    http://www.derryjournal.com/ViewArticle2.aspx?SectionID=3441&ArticleID=1629531

    It shows that there is money being invested in the UK, lots of it. The problem is that not enough of it is going to Northern Ireland.

    I saw a great programme on how Ireland got Intel back in the 80s which NI could learn from.

    Footage of people saying Ireland had missed the last industrial revolution and wasn’t going to miss this one – computers.
    They were battling with other locations and Intel had two problems: would they have workers and would the continue to have them in the future?

    The IDA tracked down Irish computer people all over the world and asked them to sign letter saying they would return. They handed thousands of these to the top brass.

    Intel wanted to see a school. The IDA called the school in advance. The best children from all the classes were put in the same room to meet the visitors and answer the questions. The less bright were spirited away. The showed an ad of children standing by the side of the road in the middle of nowhere with a school bus appearing. Education was everything.

    Ireland knew where it wanted to go and pulled out all the stops to be successful.

    What is NI’s niche and how does it intend getting there? What is it willing to do?

    The corporate tax boat has sailed long ago, NI has to be looking for the next wave.

  • Crataegus

    George

    I think off shore tax haven is the way to go!

  • DK

    Crat: “I think off shore tax haven is the way to go!”

    Do you mean like the Isle of Man: A crown dependency of the UK, but with it’s own taxation laws (income tax rates of 10% and 18% and 0% rate of corporate tax) & a parliament that meets on a hill under a tree.

    http://en.wikipedia.org/wiki/Isle_of_man

  • Crataegus

    DK

    The tax rates sound good to me and at least the parliament meets!! I don’t think we need worry too much about the crown dependency bit. There are some quite interesting tax havens.

  • fair_deal

    JEB’s comments got me thinking. Instead of seeking a broad regional corporate tax cut do we ask for a targetted one ie particular types of industries e.g. IT, biomedical get such a break in NI?

  • IJP

    Thanks George.

    “Money committed” generally means investment announcements held over so they can announce them again in a blaze of glory two years later and add them to the total that year too!

    Those figures would appear to indicate that NI is getting roughly a quarter of the inward investment it should proportionately. Yet Invest NI claims it gets 10% (i.e. four-times proportionately) of the UK total. No lo entiendo.

    Targeting makes a lot of sense, but frankly I wouldn’t trust bureaucrats who’ve never earned a penny in the private sector to select them wisely!

    I say facilitate the venture capitalists. By definition, they’ll know what they’re doing.

  • Rory

    However reasonable one might consider regional variances in Corporation Tax to be, it is so impracticable as to a duck dead in the water. The reasons for this would be the opposition of the Treasury and its Revenue officials who would be too well aware of the opportunities for fraud that would arise and the utter difficulty of monitoring and auditing complicated accounting procedures to prevent such fraud.

    In any case regional grants are a much simpler and much more easily policed method of applying state assistance to regional businesses if the government is so minded.

    Having said that, I recall one client, back in the sixties, had a small factory that straddled the border and the owner had great fun wheeling his machinery from one end of the shop floor to the other in order to maximise the opportunity for capital grants available from both authorities.

  • George

    Thanks IJP,

    Fair_deal,
    I don’t know if you can get away with targetting as it could be construed as a state subsidy for a particular industry, thus breaching EU law.

    The Irish Republic used to have separate corporate tax rates for domestic and foreign companies to attract FDI in the 1990s and was forced to end the practice by surprisingly slashing the domestic rate, thus flummoxing the EU and pocketing a permanent veto over any changes in its corporate rate in future.

  • fair_deal

    George

    “could be construed as a state subsidy”

    Thanks for that.

  • abucs

    I think for it to work you’d have to do a few things.

    You’d have to have a great emphasis and control of education so that there is a surplus of IT, chemists, engineers etc brought up and living in NI.

    You’d have to have enough local power to introduce tax concessions for establishing European business headquarters in NI and employing ‘locals’ however you wish to define that.

    You’d have to be in a stable political entity that new investors would have confidence would not change the rules for 10, 15, 20 years.

    And the difficult one – you’d have to argue that NI wasn’t a part of the UK the way Wales or Finchly are. This of course has sensitive political overtones but as people have said, if NI can do it, why not someplace else ? Which would defeat much of the purpose intended.

  • abucs

    I should clarify that last postulation.

    I don’t mean that there will need to be an arguement that NI is not part of the UK, or that many of its people are not as British as others, but that i think in order to be allowed special exclusive status, there would have to be an arguement (with Westminster) with some basis that NI was a special exclusive region compared with the rest of the UK.

  • Frustrated Democrat

    There was a tax grant available a few years ago and it may still be available.

    It brought the effective tax down to 10% for forecast profits didn’t seem to make a big difference to investment however.