Investment may depend on the rates of taxation
There are many reasons why the rates of post-tax profits made by businesses differ. Then when their profits are subject to taxation, the amount available for shareholders will vary according to the deductible allowances and rate of taxation.
The difference between the Irish 12.5% company tax and the much higher UK rate of 26% is central to the current request that setting the rate of corporation tax in Northern Ireland should be devolved.
This difference can influence investment location decisions.
Allowable tax deductions are not the only determinants of business profitability. In a comparison of differing locations, differences in labour costs and the availability of necessary skills, differences in energy costs and differences in the costs of transport for inward materials and outward products are all significant.
In addition, there are the taxable allowances and the impact of taxation. Do the tax rules of a location allow deductions for spending on product development, research and development, or any other types of spending, as an enhanced tax deductible expense?
Business results are also influenced by the amount of financial assistance offered by government or government agencies.
Less conspicuously, assessment of a location might be influenced by the ability to shift any of the profits away from higher UK taxation in to a lower tax regime. This prospect hinges partly on the exercise of transfer pricing, to reduce the UK profits, or other accounting or management charges attributable to a related business in another jurisdiction.
Comparing the Irish 12.5% rate against the UK rate of 26% is only part of the story.
The Irish Minister of Finance Michael Noonan, has dismissed suggestions that the Irish taxation arrangements allow for special arrangements that facilitate business tax rates for some businesses, effectively, well below 12.5%. In a 14 page document 'Ireland's International Tax Strategy', he presents a comprehensive review of Ireland's continuing co-operation in observing international obligations, competing fairly to attract investment, and pushing forward the international agenda on tax reform in the EU and through the OECD.
Mr Noonan makes it clear that his government will be an active supporter of international agreement to ensure that companies meet their obligations. To his credit, the Irish tax rules do have explicit guidelines to block tax avoidance by the use of advantageous but non-commercial transfer pricing.
The Irish government defends its position by pointing out that if businesses legitimately shift profits to another country, if this is legal in the receiving country then that must be tackled by the country where the benefit occurs. Ireland cannot change the law in other countries.
The Irish International Tax Strategy makes no explicit reference to the device of the double registration of related companies in different countries but it, implicitly, acknowledges that this type of arrangement is not within the control of the Irish government. Ireland has moved to change its rules so that the recent evidence of businesses operating without any declared country of residence will no longer be acceptable.
The Irish government is unwilling to agree that the EU might introduce a unified consolidated system of company taxation. Other options are for discussion but any threat to eliminate the advantage of a 12.5% company tax rate will be vetoed.
In an interesting study of the impact of company taxation in Northern Ireland, three of the larger companies, Almac, Randox and Allstate, recently paid a much lower rate (averaging 9.1%) than the normal headline rate of 26%. This may be attributed to tax allowances on capital investment and research and development. An analysis of tax payments by 15 of the largest locally registered businesses shows that over a three year period to December 2012, the average tax take was 28.7% of pre-tax profits.
This contrast does not prove the 15 paying about 28% offer a poor return for their investors.
However, it does show that rates of taxation do make a big difference.
Belfast Telegraph Digital