Alex Salmond received a boost last week to his argument that Scotland should have more control over fiscal policy. MPs on Westminster’s all-party Northern Ireland Affairs Committee said that there was a convincing argument for lowering corporation tax in the province – to attract investment and increase the size of the private sector – and that the power to do so should be devolved to its assembly. Salmond said such a move for Scotland was now “inevitable”.
The First Minister has been pressing the case for this, as well as accelerated borrowing powers and control over the Crown Estate in Scotland, with the UK Government since his party’s landslide election victory on 6 May.
The arguments for lowering corporation tax to stimulate economic growth are numerous. But not all agree: “The idea that the Republic of Ireland simply uses a low tax rate to attract foreign direct investment is shown to be one of the many myths that contribute to the cult of the Celtic Tiger,” said Richard Murphy, a chartered accountant and co-author of Tax Havens: How Globalisation Really Works.
“[The] rate is undoubtedly totemic, but low tax is a much more complex matter than just offering low rates. The Republic also has no controlled foreign company laws or thin capitalisation rules, a relaxed approach to the taxing of foreign dividends and to transfer pricing regulation, relatively easily achieved corporate secrecy and, perhaps crucially, membership of the Euro to add to its appeal.”
In a submission to the committee on behalf of the TUC, Murphy said that Northern Ireland will not be able to match any of these arrangements, meaning that tax collected there will always be higher than tax collected in the Republic on identical commercial operations even if the tax rate is equalised.
The assumption that Northern Ireland can legally reduce its tax rate to 12.5 per cent to match the Republic may well also be wrong, said Murphy. Even if legal problems with the EU could be overcome, the reduced rate of tax could not be applied to finance and intra-group service companies under EU laws; these, said Murphy, are the very companies to which the Republic is most attractive.
There are also economic objections to the proposal; such as the obstacle that would be placed in the way of trade between the UK and Northern Ireland because much of it would then be subject to “cumbersome and costly transfer pricing rules to prevent tax leakage from the rest of the UK”; and that Northern Ireland would lose at least £200m a year in subsidies from Westminster as a result of adopting this proposal.
“The conclusion is obvious,” said Murphy, “whatever Northern Ireland’s pressing needs – and they are considerable – they cannot be met by reducing its corporation tax rate to 12.5 per cent. Far from solving its problems, such a tax rate could only increase the isolation, uncertainty and cost of trading from Northern Ireland.”
Murphy’s reaction to the committee’s report can be read at www.taxresearch.org.uk/blog.