The New UK Government and Northern Ireland Corporation Tax

Northern Irish economists and politicians were delighted to have secured a commitment in the Conservative Party election manifesto (here) to “produce a government paper examining the mechanism for changing the corporation tax rate in Northern Ireland”.   There is cross-party agreement in the Assemby for adoption of the Republic’s 12.5% rate.  An interesting paper by the Northern Ireland Economic Reform Group (here) explores the legal issues, drawing heart from the European Court of Justice’s “Azores Judgement”.

14 replies on “The New UK Government and Northern Ireland Corporation Tax”

I always wince as I walk through Arrivals at Dublin Airport and see that IDA billboard with the bright young things smiling down on me, representing the best educated and most flexible workforce in Europe. I wonder if the smiling faces were replaced with black-and-white 2 metre lettering saying “12.5%” if we’d have a better chance of attracting FDI. I also wonder if even our government believes our own blurb – after all if we are such a great place to do business, then why don ‘t the MNCs re-invest more of their profits here before repatriating them as dividends or management fees to their home jurisdictions.

If the North succeeds in matching our tax rate and the UK creates its own internal tax haven (and God knows after the BVI, Gibraltar, the Channel Islands and Isle of Man, it has probably forgotten more than we’ll ever know about tax havens) then I think we’ll have a problem. The North seems already to be more competitive in terms of labour and infrastructure costs. Belfast real estate is literally a fraction of Dublin’s. So this should be a significant concern.

I would have thought Vince Cable would have some objections to creating a tax haven given his rhetoric in the past – can’t see George Osborne losing any sleep over it though. That said, if the North is ever to be weaned off the Westminster block grant then it will need develop business on a significant scale.

@ Jagdip,
(i) reinvested earnings comprise the vast bulk of FDI in Ireland; (ii) the low corporation tax rate needs to be complemented by lots of other factors, such as workers with appropriate skills, and (iii) low corporation tax does not make one a tax haven.

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@Frank,

(i) Didn’t know that, believed the rhetoric that MNCs were using us for our tax rate and repatriating profits. Plus the claim that the difference between our GNP and GDP was the oft-cited reason that it’s because MNCs are channelling income through here to get it taxed at a low rate before passing it out. Is there any good link source you can recommend that shows the composition of FDI?
(ii) Agreed but are you saying the North doesn’t have adequate workers with appropriate skills?
(iii) Pot-aAto, Pot-aaHto. Seriously?

Corporation tax is unjust. It seems “unfair” because of the power and greed that come out of many corporations. But they have greedy power because of Central Banks and their monopoly on creating fractional reserve fiat currencies. This allows Central Bankers to loan out vast amounts of “money” at very low interest rates that multiplies into vast vast amounts of “money” that turns into traps of long term debt and immoral risky ventures. Yet, They are deluded into thinking there is no real risk because they can bail-out, destroy or enslave anyone they choose with this power. Think about it. How would you be if you could print “money” legally out of thin air? MORAL HAZARD

Corporations’ greed would be restrained if “money” had a weight, there was no central banks and “ministers” were held to account to the law of the land. Then there would be risk in investing and they would know it. Risk weeds out the garbage. They would be far more productive and could keep their deserved earnings.

Central banks are steadily increasing their controls over the leadership and laws of the nations. The leadership and laws of nations are steadily increasing controls over the economics of their lands. This will result in shortages, higher prices and more unjust taxes, inflation, slavery, wars, …. The freedom to invent and produce will diminish. Our, our childrens’ and our environment’s futures will be dimmed until…

Money does not need to be legitimized by a state stamp. Just weights and measures are required.

FDI direct jobs this year will fall to the 1998 level of 118,000.

At 1.9 million, we now have 400,000 more in employment than in 1998 and 200,000 more in unemployment, but employment in the main growth engine of the economy has stalled.

In related news, economists at the Petersen Institute recommend that the Obama administration propose to Congress to allow US-based multinationals repatriate dividends from their foreign subsidiaries at a flat rate of 5 per cent:

http://www.finfacts.ie/irishfinancenews/article_1019663.shtml

@Frank,

Thanks very much for the links which I’ll study. Looking back at my original post it does look bleak as if I mean we’re hellbound in a handcart which is not the case by any stretch. However developing a 12.5% rate in the North will make the Chinese and Indian versions of Intel and MS think twice about where to locate.

@All

I support this move. Pretty sure though that the Scottish Nationalists will peruse carefully any “government paper examining the mechanism for changing the corporation tax rate in Northern Ireland”. Tough battle for N.I. Assembly to win with incoming Government. A strong show of support from Dublin would assist in navigating EU pathways. Anyone see a vote on this in the House of Commons during the present Conservative/Liberal Democrat coalition? Yet there is a case to be made in terms of fiscal devolution – apparently concentrating minds at many levels at the moment for those who thought they aleady had it.

Jagdip

I see this as political, towards nominal reunification of the island of Ireland. Slow process. There will be little opposition to this in the 26 counties. Think of FRG and DDR?

There will be plenty of personnel movements and think co-ordination of industries. NI will stake a claim for comparative advantage say for weapons or aircraft making. Legitimately. Even specialized ship building. The security forces there will not be so numerous soon. Industries will replace them.

You brought up the Chinese version of Intel etc. Why would they relocate to Western Europe? They have 200,000,000 to employ! WTO will take care of access to markets. The 12.5% rate may attract them but the decision to base in NI, Scotland or 26 will be on available skill sets? I am presuming that skilled use of English will rule out Latvia et al for certain industries. Their local costs will be lower for many other industries.

Drumroe
CT is not unfair. It is just another expense of doing business. The interplay of taxes is complex and lucrative, not just for governments, but for professionals and I do not propose to subject myself to textbook analysis here! Likewise the interplay of banking and governments. Let us all agree that Ireland’s government, like that of Iceland and many others was way out of its depth. The lure of instant money and wealth is very difficult to resist but a little knowledge of history will soon reassure that it is dangerous indeed.

All
Australia has embarked on reducing CT to 25%, except for miners. As they are too large a part of our economy, they are being discouraged by a super tax of 40% over a nominal, 6% at the mo, rate of return on capital on top of the about to be 28% rate. We have recognized that we are too wealthy. The aim is to build towns, rail and port infrastructure to cater to mining. Waiting for corporations to do it might take too long and they do not have the powers of acquisition of land etc that the Feds have. The benefit will flow through to miners eventually, but opposition is loud at the moment!

Ireland cannot do this as Ireland has not bothered to establish what wealth it has. Too smug being a tiger? Land policy is intimately involved. Too hard to develop? Queensland has enough coal seam gas, CH4, to last 500 years apparently. Then there is the coal ….. Find those minerals with the cheap labour now available!

@ Geckko,
Not sure what your point is. If they are retained as passive assets rather than reinvested they are not eligible for the 12.5% rate.

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Frank,

The point being that FDI as recorded in the national accounts records retained earnings, that are deemed to be reinvested – but a large proportion isn’t actually invested in any real world sense that they add to the productive capital of the country. (as opposed to add to the FDI shareholder equity in the company).

Google earns €2bn in Ireland from European operations.
€2 bn is deemed to be repatriated as dividend in income account BoPs
€2bn is deemed to be “reinvested” under the capital account (when it isn’t in any real sense).

This holds until such a time as the capital is repatriated under some tax compliant accounting methodology to a parent in somewhere like Bermuda.

@ Geckko,

My point is that company income arising from investments in money, securities or property – rather than from active trading – is taxed at 25% rather than 12.5%. Are we talking about the same thing or perhaps at cross-purposes?

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