Why we should scrutinise tax affairs of big investors
Attracting foreign direct investment (FDI) to Northern Ireland is part of the ambition of organisations such as Invest NI. The hope is that Northern Ireland can deliver a combination of facilities, services and taxation arrangements that enhance the profitability of projects.
The attraction of FDI is a more complex process than it may appear. It is multi-national, as well as heavily influenced by international comparative taxation systems and differences in the availability of incentives.
Northern Ireland has generally, in the past, taken a straightforward approach to attracting FDI. Are the costs of doing business competitive with other rival locations? Does the extra assistance from Invest NI and the UK corporate tax system help to make a local investment more appealing?
In reality, the decision-making by potential investors is more complicated. Not only do they consider the viability of locating a project here but, in making a choice, they will consider the merits of Northern Ireland relative to other places. Into that decision matrix, and alongside the basic cost comparisons, there is a range of other options affecting an assessment.
The options include:
• differences in corporate taxation regimes,
• ability to shift (re-allocate) profits legally but artificially,
• ability to shift costs to reduce taxation in different places, and
• complex inter-company arrangements to shift profits and/or capital costs.
Into this confidential and nearly impenetrable business matrix, Northern Ireland agencies emphasise how local operations can be enhanced by financial assistance from agencies such as Invest NI, taxation incentives related to R&D spending and, still to be implemented, the ability to levy corporation tax at more advantageous rates.
The corporation tax changes may be significant. However, Northern Ireland agencies now need to take a continuing, well-informed interest in the behaviour of international businesses in response to the emerging (and overdue) international efforts to limit the distorting effects of a range of incentives being applied by other governments, tax authorities or official agencies.
The essence of the concern is that many businesses, usually perfectly legally, have arrangements which mean that there is a separation between the place where the economic value of a business is found and the liability to taxation. A number of high profile cases attract attention, including some businesses which attribute significant turnover to Ireland and pay little taxation. Some of these businesses do this to minimise their tax liability in the UK.
From a Northern Ireland perspective, tax reducing behaviour by large firms is outside local control.
Local interest in the behaviour of externally-owned businesses should be more intense. First, this is because an understanding of what is happening is a basic requirement. Second, because there are international changes in contemplation which, if they are effective, will change the international rules and behaviour.
Even today, there is no comfort in believing that Northern Ireland is not affected by the financial and legal manipulation of FDI.
There are significant numbers of businesses whose behaviour needs to be better understood. Locally, there are several businesses which have linked subsidiaries in the Virgin Islands, the Netherlands, Luxembourg, the Channel Islands and the Isle of Man. These linked companies are often important as a source of tax advantage through financial structures, royalties and patent charges, or transfer pricing.
The G20 meeting of Heads of Government has considered new guidelines on how the developed countries are expected to change the international codes of conduct to reduce the various types of artificial fiscal distortions. In principle, taxation should be based on where economic activity takes place.
Of course, agreement at the G20 is only a first critical step. There will not be an overnight change. At present, marginally, Northern Ireland is a loser as big business exploits artificial arrangements. Local agencies now need a better understanding of, and anticipate, what is happening. Incidentally, the Irish government will be following these developments closely.