Belfast Telegraph

Corporation rate 'a vital variable'

By David Elliott

The rate of corporation tax is the second most important factor used by global companies when considering where to set up an overseas manufacturing base, US investment bank Morgan Stanley has said.

"While growth is clearly an important factor, it is also clear that the corporate tax rate is the other single most significant variable that can swing the decision over where to locate a manufacturing facility," analyst Todd Castagno said.

Its analysis, which comes ahead of a debate in the House of Representatives over proposals to overhaul the US tax system, follows the recent deferment of a decision on whether to devolve corporation tax setting powers to Northern Ireland by Prime Minister David Cameron.

The US is considering whether to lower its 35% corporate tax rate to around 25% while there have been calls by business groups here for a reduction in Northern Ireland's main business tax rate to 12.5%, the same as that in the Republic, from the current UK-wide rate of 23%.

Proponents of the latter move say it will put the Northern Ireland economy on more of a level footing with the Republic when it comes to attracting inward investment, a factor Morgan Stanley's analysis backs up when it comes to global manufacturing companies.

The research compared the manufacture of goods in China, where corporation tax is 25%, and the US, at 35%, and found that "the higher US corporate tax rate could still incentivise the production of goods outside of US, even when labour costs, productivity and supply chain considerations would argue for domestic production".

But because manufacturers there are able to save on taxes by deducting the cost of depreciation of high value equipment from taxable income, other, less capital investment industries are likely to benefit more from a reduction in corporation tax.

Although referring to the impact on the US manufacturing sector from a change in tax policy there, any change could also have a big impact on other sectors.

"We believe that partial tax reform will benefit domestically-focused service and low capital intensity industries over manufacturers given the absence of several manufacturing-specific tax provisions," Mr Castagno said.

That means a cut in corporation tax in the US could impact on Northern Ireland where "low capital industries", such as financial services, from there make up the bulk of inward investing companies.

25%

Proposed new tax level for the US12.5%

Rate of corporation tax business leaders aim for£250,000

Contract for eco-fuel firm based in Lisburn

Belfast Telegraph

Popular