Monthly Archives: January 2014


N.Ireland, reduction in coporation tax?

Rates of corporation tax vary as greatly within the EU as any other form of tax. At the bottom of the ladder is Bulgaria, where it sits at 10%. Malta sits on top at 35%. Within the UK and Ireland the variation isn’t quite as stark, but it is wide nonetheless. The United Kingdom (UK) applies a rate of 23% while the Republic of Ireland (RoI) levy sits at 12.50%. This and other tax differences have prompted sharp discussion about the economic impact in Northern Ireland (NI), the only region of the UK with a land border with another state – the Irish republic. The lower rate of VAT in the UK compared with RoI has been a noticeable advantage to retailers on the northern side of the Irish border, but there are loud voices claiming the regional economy is hindered by the level of tax paid by business. Those voices belong not only to company shareholders and directors, but also to political decision makers within the NI regional administration. Representatives from across the NI political spectrum have jointly petitioned the UK central government for corporation tax powers to be transferred to the regional government as a first step towards lowering it.
A local reduction is strongly favoured by the business community, and arguments in favour often cite the example of other jurisdictions, including the rest of Ireland, where lowering corporation tax has been followed by higher levels of foreign direct investment and job creation. The opposing view is that the sluggishness of the NI economy is due to past communal conflicts, a shortfall in workforce skills and inadequate infrastructure. Reducing corporation tax could simply be a race to the bottom if other regions do the same, leaving underlying structural problems unsolved.
Alongside the economic arguments are the inevitable political arguments. For the UK government there are various matters to consider. It could create a “tax haven” inside the UK, with companies based in England re-registering in NI for tax purposes only, without moving their physical operations. Assigning responsibility for corporation tax in NI to the local administration will inevitably raise the question of whether Scotland or Wales should get the same treatment. If authorities in London decide this should remain a national responsibility it will be interpreted by some as hostility from central government to the idea of devolution, potentially fuelling the case for Scottish independence. If London says “yes” the resulting divergence will cause fiscal division within the UK as a whole with resulting administrative difficulties.
Central to these discussions are the potential effects of changes to the Selective Financial Assistance programme. This has been a means by which local government in NI has aided development, modernisation, efficiency and expansion of industry. Under EU rules the scheme will continue in its present form until 31 December 2013 and is due to be revised thereafter. Current trends suggest that the EU Commission prefers to limit such schemes to less developed regions of Eastern Europe, so NI may find that it can no longer continue the policy. The EU dimension is made more complicated by the position Brussels takes on Member States having internal tax variations. EU Code of Conduct rules regarding business tax competition between Member States seeks to limit the extent to which governments can structure their policies for national advantage. Article 87(1) of the EC Treaty forbids any type of aid by a Member State “in any form whatsoever” distorting competition. Under the State Aid Guidelines from the Commission in 1998 a reduction in corporation tax can be construed as “state aid” which impacts upon trade between Member States. ECJ case law has found the same, but this does not act as an absolute bar, because the case law also allows for a regional tax variation if it that same region alone internally compensates for the revenue lost.
In the context of Northern Ireland that means that the NI regional administration must meet the cost of lowering corporation tax, not the central government in London, in order to be compliant with EU rules and not have it struck down by the ECJ as a form of state aid. To satisfy the “sufficiently autonomous” test there must be no corresponding compensation from the UK central government. There is thus a question of finding a balance between lowering the rate (and thus revenue income) while at the same time experiencing reductions in central government funding, set against the potential benefits of foreign direct investment and the increase in the revenue base that is hoped for. A gradual period of staggered reductions might be the answer, but it could also keep potential investors waiting on the sidelines until they think the rate has dropped as far it will. What is certain is that if the decision making authority is transferred from London to Belfast this will become a local problem requiring local solutions.

Please contact Philip Gilliland for further information