Deal for corporation tax only starts big questions
The UK Treasury and the Executive are within days of an agreement which would underpin legislation to devolve authority to Northern Ireland to administer corporation tax.
Far from being the end of the debate, the agreement about devolution opens an array of further critical operational questions. Clarity is needed, first, on which businesses will qualify for the lower tax rate and, second, on the local competence to set the various allowances (for research and development, training and capital spending) that can be claimed from taxable profits.
The simplest form of devolution would be to say the rate of corporation tax for businesses registered in Northern Ireland would be the only difference from the Great Britain system. That way, all the administrative processes in HMRC would be unaltered. Only the calculation of the tax bill for a Northern Ireland registered company would differ.
That simple answer is inadequate and could be unfair.
Will the reduced rate of corporation tax be available to all Northern Ireland registered companies wherever they do business? Would locally registered companies which do (much of their) business outside NI face reduced tax bills for business done in England or Germany or in the Republic.
Logic would suggest that if a business is operated and fully controlled from Northern Ireland, then the lower tax rate should apply. Subsidiaries and joint ventures domiciled, or resident, outside Northern Ireland might not be eligible.
Even that logic raises serious questions. Would it be acceptable if an existing business, registered in England, transferred its registration to Northern Ireland and then claimed the benefit of lower tax rates, even if (say) 90% of the turnover was in England? The Treasury will want to legislate to block notional business transfers?
To restrain artificial business restructuring, should there be a requirement that a minimum level of activity must be carried out locally?
These are far from academic questions. Several large international businesses are controlled from Northern Ireland. This control is significant for Northern Ireland and these companies should be incentivised to expand here.
And, if a business registered in England does business in Northern Ireland, such as the large multiple retailers, will they be eligible to claim lower corporation tax on their NI operations, provided they can compile separate audited accounts? The test should be the degree of control and decision making in Northern Ireland.
Since the motivation is to attract investment, a critical corollary is that new investors from other countries (eg the USA) should be eligible to apply the benefits of a UK/USA double tax agreement to earnings in Northern Ireland. This might need the Treasury to negotiate specific variations.
Then there are the further questions on setting tax relief allowances. Does the Executive wish to have devolved authority not only to set rates but also to devise tax relief allowances? This opens a major debate on the cost of the administration.
Northern Ireland would like to offer tax allowances for R&D, innovation, training and capital spending that are more attractive than UK (or Irish) rates. NI could expect to make these changes subject only to minor restraint from EU State Aid rules.
In the debate, to date, the priority has been to get approval in principle. Now attention must now be placed on how to make the system work. Business and government must now move beyond grabbing easy ambitious headlines.