Corporation Tax set to be reduced?

The BBC is reporting that Northern Ireland will be allowed to cut its rate of corporation tax next year. According to Andrew Neil on the Politics Show:

“…the politics show has learned from senior treasury sources that the London government is indeed minded to grant Northern Ireland its wish,” he said.
“Although it might not be allowed to go as low as 12.5%, since Ireland is under EU pressure to raise it, any decent cut would make Northern Ireland more attractive to private enterprise.”

SDLP leader Margaret Ritchie said her party had long supported the idea of “equalising” corporation tax between Northern Ireland and the Republic.

“When an investor comes here from the US or the far east, they will go to the region that has the lower level of corporation tax,” she said.
“Hence the south of Ireland has seen many good examples of foreign direct investment and we in the north have lost out.”

DUP MLA Peter Weir said cutting corporation tax would be something that should be “phased in”.

“There are certain implications with regard to corporation tax. I would like to see this as something which takes place over the life of the next assembly,”

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  • ItwasSammyMcNally

    Corpo tax reduction does seem to work and was the foundation for rapid economic development in Hong Kong and the rest of Asia – and of course in the other 3 provinces of Ireland.

    Presumably Nationalists (SF and the SDLP) will support all power being transferred away from Westminster and to Stormo – allowing the British to simply pick up the tab and the (Ulster) Irish deicding how to spend it.

  • USA

    It would certainly argue for the reduction of corporation tax as this step alone will help attract some additional FDI into the North, but that is only half of the equation.

    Lets take the example of US business owners. They are obviously not interested in the tiny market in Ireland, they are interested in access to the wider European market and it’s 300 million consumers.

    Business people do not like uncertainty, they like to know the value of a deal years into the future in order to forecast revenue, break even points, costs etc. As the currency of the Euro zone is the Euro, dealing in British pounds (in the North) introduces additional currency exchanges and potentially exposes US investors to unwanted currency fluctuations. US business owners will consider this potentially costly and erratic component into their final decisions. As they are used to a single currency in their vast US market, they will naturally be attracted to the same in Europe. Consequently I believe they will not consider the British pound element favorably, and this will continue to give the republic an opportunity to differentiate itself and gain a competitive advantage over the North when attracting FDI.

    So yes, reducing the corporation tax will make the North more attractive, but it is only part of the formula.

    What does Weir mean about “there are certain implications with regard to corporation tax”. If his response has nothing to do with economics then he’s talking fluff.

  • lamhdearg

    one wonders that in our united europe corporotion tax ( like lots of other things)is not the same across the board.

  • ItwasSammyMcNally

    lamhdearg,

    “one wonders that in our united europe corporotion tax ( like lots of other things)is not the same across the board.”

    You could say the same about the single currency being used in all EU countries.

    In the longer term, economic homogenisation looks the likely outcome.

  • It will need a lot of safeguards to ensure that corporations can’t set up a registered office in NI without actually doing something productive, like manufacturing… if that’s even possible.

  • ItwasSammyMcNally

    Andy,

    “It will need a lot of safeguards to ensure that corporations can’t set up a registered office in NI without actually doing something productive, like manufacturing… if that’s even possible.”

    That will be more of a problem for the countries who should be getting the tax rather than for Ulster – it is better for Ulster to get 10% (often of very large amounts) than to get nothing.

  • Sammy,

    I would go further than that. Even if corporation tax was nil for the new companies that come here, the fact is, they will bring employment. It is a winning formula for Northern Ireland. We may actually see a few companies relocating from other parts of the UK.

  • PaulT

    wouldn’t hold my breathe on this one, the dreaded ‘sources’ is normally the killer.

    esp when followed by

    ““Although it might not be allowed to go as low as 12.5%, since Ireland is under EU pressure to raise it”

    because, there is no legal arguement against 12.5%

    in fact the comment is plain stupid, ie is it that the EU countries that have a 30% CT rate would be happy for NI to have 20% one but not a 19% one, WTF

    However (can’t be arsed to google it) I’m pretty sure in the last few months there was a legal arguement that you can’t drop the CT rate in one region of a state.

    AND the real killer is that neither the Tories or Labour have any MPs in NI, WHY would they piss off the voters where they do have MPs by making NI more attractive to businesses.

    Labour looked after the shipbuilders in the NE (2x aircraft carriers) Tories look after Bankers, weirdly this is all going to change and they will look after those who don’t vote for them, dream on.

  • Mack

    @Sammy

    That will be more of a problem for the countries who should be getting the tax rather than for Ulster

    That’s a difficult one to disentangle. Companies such as Nestle, Volkswagon, Microsoft etc aren’t under any moral (or legal) obligation to pay tax on profits earned within a given market (given the host government would be doing the taxing, you would wonder what the point of exporting anything at all would be?). Even if they did Nestle in the UK (for example) would clearly benefit from the Nestle brand (which in turn would be at least in part funded by Nestle’s economic activities elsewhere), so how much should Nestle UK pay for the privilege of using the Nestle brand (or know how, processes etc)?

    If an MNC’s intellectual property (brand, patents, copyrights, secret sauce etc) is truly valuable it could significantly reduce the taxable profits in any given region as subsiduaries would be paying exobartant licencing costs. Clearly they probably (morally) should be paying those licence fees to the regional operators that generated the IP in the first place (unless sold at a realistic and fair market price) but in the real world it looks like it’s not uncommon for those fees to be paid to subsiduaries in exotic tax havens instead..

  • DC

    Leaving aside FDI for a moment, it will still be a nice little boost for local businesses as well, a reduced corporation tax at a stroke maximises profits – all this courtesy of an act of statute – without any additional labour expended in the process.

    To me this corporation tax cut is a no brainer in that Britain’s big pharmaceuticals were pissing off to Ireland anyway, this might encourage them to stay within the UK system. I think the policy is a runner. Because in politics timing is key, having the policy floated in the right place at the right time. I can’t see the EU putting up much of a fight, the reasons for doing this are strong.

    Having more private sector work in NI will bring about a psychological change – there will be more opportunities to work for and inside multinational companies, the workforce over time should become better equipped to hold its own in the global marketplace – the skills from working inside MNCs could be used locally to create more indigenous businesses. Compare this to working inside a heavily regulated public sector environment and ethos, which is hierarchical and at times held captive to groupthink – think Stormont as a fine example of group-think problems eg deadlock and non-decisions. So bascially more MNCs in NI could be just the chance to say goodbye to our little bi-national outlook.

  • Dewi

    If true this would set an astonishing precedent. Scotland?

  • Pete Baker

    On the EU question.

    In a message on Twitter, Mr Van Rompuy had initially said: “We have an agreement on the Pact for Euro.”

    The message was later amended to: “Update from ongoing meeting: Agreement in principle on the Pact for the Euro, but still discussing the other elements of the package.”

    A pact would give members a say over each other’s major economic policies – a move aimed at keeping countries under firm fiscal discipline.

    Any agreement would need to be endorsed at a summit of all 27 EU states on 24-25 March.

    Which raises the question of the validity in seeking to lower corporation tax rate when the EU is seeking to harmonise that rate.

  • Dewi

    Pete – I think he was referring to states within the Euro.

  • DC

    What does Weir mean about “there are certain implications with regard to corporation tax”. If his response has nothing to do with economics then he’s talking fluff.

    He means that the Executive hasn’t figured out how to offset the cut in the block grant – the subsidy from London – that will come with the package of devolved corporation tax powers. Will this mean job losses? Or, water charges? Etc.

    Same kind of detail Jim Fitzpatrick was trying to squeeze out of Attwood, if memory serves me.

  • aquifer

    “Business people do not like uncertainty, they like to know the value of a deal years into the future in order to forecast revenue, break even points, costs etc.”

    Yep. So publish a timetable for rates in advance.

    Yes large multinational manufacturingI companies might like to be in the Euro Zone rather than the Sterling zone.

    However this can matter less to fast growing companies and to companies doing a lot of R&D. If they want to build their Eurpean manufacturing plant in Co Louth later we will probably not loose by it. It will also matter less to really global companies, and the personnel of companies may look to English speaking London rather than to Europe.

    The thing I like about lowering corporation tax is that it is a challenge to walking dead local family firms. Their sudden increase in profitabilty will push them to decide whether to take the money and sell out to inward investors, or to grow fast. Either way we can win.

    The prospect of growth unconstrained by tax could attract smart innovative companies with new products for global markets. A company growing at 40% a year is less concerned about an exchange rate risk unlikely to amount to plus or minus 10% in any year.

  • the future’s bright, the future’s orange

    won’t happen.

  • DC

    The Future’s Bright

    I don’t think you understand – the transfer of powers has been agreed in principle by the Treasury – if it doesn’t happen that will be down to our MLAs not agreeing to taking on those additional powers.

    I think it’s a runner.

  • ItwasSammyMcNally

    Having opposed the transfer of Police power can we now expect the UUP to give birth to an another similar arguement of convenience along the lines of – we agree in principle but not until after the reform of Stormo – whilst at the same time trying to embarass the DUP by suggesting that this approach suits Nationalism.

  • Neil

    It’ll be tricky trying to figure out how to go about lowering the rate. Lower it too much and we lose the majority of our subvention. Lower it too little and no companies will come, and we’ll still lose money.

    Should be interesting to see how any opposition frames it’s argument. Difficult to say ‘we don’t like this idea of creating some kind of wealth income in NI, and we think we should stick to the begging bowl approach that has served us so well’. No-one really wants to hear that anymore.

    Fair enough that peace should bring benefits, but it would be nice to think those benefits could be used to created some kind of sustainable economy, as opposed to pished up a wall giving huge wages to failed politicians on worthless quangos. Maybe be too much to hope for though, the begging bowl position is our default one. Why try to stand on your own two feet when you have someone who’s prepared to carry your lazy ass.

  • ItwasSammyMcNally

    Neil,

    RE. “Should be interesting to see how any opposition frames it’s argument.”

    See post above re. UUP – The Not Ready for it now arguement is easily advanced and defended.

    Another old chestnut that will no doubt be rolled out will DUP dancing to the SF tune this arguement will be deployed as back-up to the argument above and also needles the DUP in their politically sensitive zone.

  • vanhelsing

    I think Peter Weirs comments are about right – I would assume that he is talking about what DC mentioned regarding the readjustment of the Barnett formula and the reduction of the block grant from the treasury to offset. The treasury won’t be giving us a free lunch, I’d wait to see the detail before the rejoicing begins.. 🙂

    Whether we go for this or not would be up to the opportunity cost in the decision.

    I guess the other thing to factor into this one is how Enda gets on with Angela and whether the Republics Corp Tax is effected. There were rumours that if the Reps interest rate on the loans was to be reduced then they would have to raise their Corp Tax. This would maybe bring both NI and the Rep closer in line. Just a thought…

  • USA

    If Weir is referring to the Barnett formula for British funding, then yes he is right to consider the “opportunity cost” (credit to Vanhelsing).
    But as someone else said, it’s still better than the begging bowl approach. And there is a need to stimulate entrepreneurship and private sector employment.

  • Old Mortality

    I am sceptical as to the likely benefits of a lower rate.

    (1) It is often forgotten that the RoI operated a dual corporation tax until forced to adopt a single rate by the EU. That process was not complete until, I think, 2005. Before that, only manufacturing and financial services located in the IFSC attracted the lower rate.
    NI will not be able to selectively apply a lower rate which means that banks, retailers and property developers will be among the principal beneficiaries right from the start.

    (2) Multinationals may feel that NI is a less attractive domicile for tax avoidance than the RoI which is a sovereign state. In other words, Dublin is a more plausible location for your European headquarters than Belfast.

    (3) The low corporation tax in the RoI appears not to have galvanised indigenous enterprise as much as might have been expected. I’d even suggest that the single low corporation tax may have contributed to the property bubble in the RoI by making activities like property development as fiscally attractive as more productive investment.

    (4) Growing companies of the type which we presumably wish to attract and nurture will have an effective tax rate of well below 28% because of investment allowances. Perversely, a lower corporation tax rate might discourage investment for this reason.

    Of course, all this will be purely academic if our politicans think that a couple of hundred million cut in public expenditure is too high a price to pay. They give the impression that stimulating the private sector is an unfortunate necessity because they will not be given the resources to continue expanding public sector employment.

  • lover not a fighter

    Its a good all-Island policy so I am in favour and the word from the treasury is that it will happen.

    The NI economy needs a kick start in the private sector so its a no brainer really.

    Actually Ireland needs a kick start at the moment so a good all- Ireland policy.

  • Old Mortality

    lover
    Not clear to me how a lower Corporation Tax in NI would benefit let alone kick start the economy in the rest of the island.
    In fact the Irish economy has already been kick started by exporters but unfortunately too little of the economy is involved in exports which partly supports my view above on the limited impact of lower corporation tax.

  • Comrade Stalin

    There are a few things I would say here.

    I think this is actually going to go ahead. It’s not too hard to read the tealeaves; the government haven’t moved to try to stop the speculation, and Sammy Wilson has been focussing the discussion on the question of whether or not it is a good idea rather than whether or not it is possible which, at least, implies that he thinks that it could happen.

    The other angle to look at here is that of the ideological position of the mostly Tory government in Westminster. They are in principle in favour of encouraging business by reducing tax. Could they be looking for a vehicle to test out such changes and demonstrate – as they would see it – their effectiveness in increasing business activity and reducing employment ? It wouldn’t be the first time NI has been used as a testbed within the UK – think of when the smoking ban was introduced here some time ahead of the rest of the UK. I would say that there are some Tories who see introducing substantial corporation tax cuts in NI as a prelude to rolling out the same cuts across the UK.

    Perhaps that is part of the game Wilson is playing; perhaps he feels that the Tories have this in mind and perhaps they would be willing to offer us the cut on cheaper terms with respect to the block grant.

    In legal terms I really don’t think there is any impediment. The IFSC is an example of a tax haven established with European agreement within a European member state. NI will merely be a super IFSC-like entity within the UK. You can expect measures to stop the City of London uprooting itself and landing in the Titanic Quarter. Expect the legislation to say something about the tax benefits not applying to any private or public UK-registered companies with capitalization above a certain value.

    In practice I’m weary of the arguments that this change will, by itself, lead to the transformation of NI into some sort of economic powerhouse. Ireland had low corporation tax for a very long time and only lately began to see benefit from it. I suspect US multinationals are perhaps less concerned with tax than they are concerned with a good place to find well educated graduates who speak English with what used to be a low cost base.

  • Old Mortality

    ‘The IFSC is an example of a tax haven established with European agreement within a European member state.’

    Not so Comrade, the EU insisted that the Irish adopt a uniform tax rate. It was partly in order to preserve the fiscal benefits of the IFSC that Ireland decided to establish a low rate with possibly deleterious consequences (see my first post)