Thursday 8 December 2016

Richard Curran: Promise by British prime minister to cut corporation tax just isn't believable

Published 24/11/2016 | 02:30

Theresa May
Theresa May

Headlines about the UK slashing its corporation tax rate to below 15pc could be interpreted as another nail in the coffin of the competitive tax advantage Ireland has enjoyed in attracting foreign multi-national investment over many decades. But this "promise" from British Prime Minister Theresa May has to be seen in the context of a series of flip flops she has done since the Brexit referendum.

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Here are four salient facts about Mrs May's tax promise.

1. Context

It was delivered in a speech to business leaders in the UK, the aim of which was to strike a more conciliatory tone and combat their uncertainty about the future. In the same speech she gave the impression she was open to reaching some kind of transition arrangement with the EU after the Brexit process in order to make the changeover smoother for companies. Yet, she didn't go as far as saying she would actually look for a transition deal in the negotiations.

She committed to increasing funding for research by £2bn (€2.3bn) a year, but also watered down a commitment to have worker representatives placed on the boards of companies.

Overall, the speech was neither here nor there but made up of what the prime minister may or may not do.

2. UK corporation tax today

The UK's corporation tax rate is 20pc, having been brought down by the David Cameron-led Tory government. There is already a commitment to reduce it to 17pc by 2020. Mrs May did not put a time frame on her promise to deliver the lowest rate of the G20 economies. It was a promise easily given, but as a policy it might be more difficult to deliver.

3. Uncertainty

Nobody has a clue, including Mrs May, about what the position of the British economy and exchequer funding will be after Brexit is complete. Right now it isn't even clear whether the economy will have access to the European single market or whether the City of London will lose its EU financial passporting rights. Her Cabinet is split on many of these issues.

This will all have a significant bearing on what the UK will be able to afford to do in 2020.

4. Is it affordable?

Less than a month ago the British government gave a secret commitment to the Nissan car company that it would not be disadvantaged in any way by Brexit in return for an assurance that it would proceed with an investment to manufacture the new Qashqai range of cars in the UK.

If the UK loses the single market, this will be an enormous blank cheque to Nissan and a raft of other manufacturers in other sectors which will seek a similar assurance.

The UK has been incredibly stable in its treatment of corporation tax in the overall mix of taxes. Last year it took in around £47bn (€55bn) in Corporation Tax or 9pc of all tax collected. In 1980, Corporation Tax accounted for 9pc of all the tax collected. Cutting the rate to 14pc on the same profitability levels as last year, would leave a fresh hole in the exchequer of around £14bn (€16,6bn).

Presumably, the plan is that a lower rate would attract more inward investment and increase the pot of corporate profits to be taxed at the lower rate. But when it comes to Brexit, can that really be assured?

There are very real dangers for Ireland from a very competitive UK Corporation Tax rate. And it is set to be very competitive regardless of the May promise this week.

The biggest danger for Ireland is that we are so dependent on just a handful of big multi-nationals for so much of our corporation tax.

Last year the Revenue took in €6.8bn in corporation tax in Ireland. Foreign multinationals account for 80pc of that. The top 10 companies pay out 41pc of it.

This is an enormous concentration of risk with just a handful of corporations. If they pulled the plug, the cost would be enormous. However, we can take some comfort from the scale of the investments the top 10 companies have made in Ireland. They wouldn't pull the plug that easily.

Also, job announcements in the UK in recent weeks have boosted the message that the UK won't suffer that badly after Brexit. I think this is a myth.

Commentators point to Facebook's announcement this week of a major expansion of its UK operations with the creation of 500 new jobs. This will bring its staff numbers to 1,500 in the UK.

Google recently announced a 3,000 job expansion in the UK by 2020. Amazon has also announced new jobs recently. But you have to ask, what these new employees will be doing in these jobs.

Many of the jobs announcements are about serving the UK market of 65 million people. Why wouldn't successful growing tech giants need to hire a lot more people in such a significant market and one of the richest countries in the world?

The other element to those UK job announcements was around R&D and technology. Mrs May's commitment to increase state funding for research by £2bn (€2.3bn) a year lays down a real marker, which could affect Ireland's tech aspirations more than the lower corporation tax rate.

We want Ireland to be a place where techies develop new businesses and we can attract the most talented people. Global companies want to locate high-end research jobs in places where they know there is a large talent pool. London fits that bill, with or without Brexit.

Interpreting Mrs May's comments on Brexit has become so difficult that a credibility deficit is developing there. Ms May has gone from backing a Remain vote in the referendum, to signalling a hard Brexit with immigration control at its core and then from castigating big business for excess and bad practices, to sucking up to them with promises of corporate taxes of below 15pc.

If she is serious about fulfilling the mandate of all of those people who voted for Brexit, I am not sure how many of them would feel about her promising to slash corporate taxes to under 15pc.

Unfortunately, there are genuine major forces stacking up against Ireland's tax advantage. But some of the tax avoidance facilitated by us has been far too aggressive anyway. We have been asking for trouble.

Ireland has played a clever game in moving in conjunction with the OECD's international BEPs reform process, but that doesn't look like going far enough for some in Berlin, Brussels, London and now Washington.

The tax game is moving. The deeper threats to Ireland's economy will come from risks to the Eurozone itself, a massive Brexit blow to indigenous industries in key sectors such as food and the possibility that if Britain really does make a mess of Brexit from a trade point of view, we will be badly hit in the crossfire.

As for headlines about Trump and May delivering corporation tax rates of 15pc, I will believe it when I see it.

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