EU won't stand in the way of a cut in corporation tax
European rules will not stop Northern Ireland from taking control of its own fiscal future, says Eamonn Donaghy
Published 21/01/2011 | 08:00
The Northern Ireland Affairs Committee at Westminster last week continued its inquiry into the benefits that might arise if the Assembly had more power. Specifically, it is focusing on the benefits of the Assembly having the power to introduce a lower rate of corporation tax.
The committee took evidence from an expert on EU commercial law from Glasgow University and also from a senior official of the European Commission's taxation division.
All are agreed that EU law is complex. But there were some very clear messages from both experts that the Assembly could introduce a reduced rate of corporation tax for Northern Ireland if it passed the tests set out by the EU Court of Justice.
Not only that, if the UK Government notified the EU Commission in advance that the Assembly was varying the corporation tax rate, then the EU Commission would likely be quite happy with the arrangement.
The EU Court of Justice tests were arrived at when it considered a similar policy being followed by the Azores. Though Portuguese-controlled, the Azores Islands operated a different tax regime to that applying in Portugal.
The three tests are:
1. The region itself must have political and administrative independence from its central government;
2. It must be able to take the decision to vary its corporation tax rate without central government being able to intervene, and;
3. It must bear the full consequences of varying the corporation tax rate with no intervention or financial aid from central government.
The witnesses at the Westminster hearing felt that Northern Ireland could fulfil the first test as the Assembly functions as an autonomous legislative body. To pass the second test, Westminster would have to devolve taxing powers to the Assembly.
Finally, to pass the third test, the Treasury subvention to NI would need to be examined to ensure that it did not fund the reduction.
Another area of potential conflict with EU law is the so-called "state aid rules". These are designed to ensure that no one business sector or category of taxpayer gets preferential treatment over another. If the reduced rate were to apply to all Northern Ireland companies generally, there should be no difficulties here.
Of course, as well as there being legal obstacles, there can also be political obstacles in an EU context.
An official from the EU tax division explained that the EU member states tend to operate within a "code of conduct" agreed by the various finance ministers. This code tries to minimise harmful tax practice not overtly caught by the legal rules already described above.
The official indicated that it was well-established that applying a reduced rate of corporation tax to all companies in a region was not in itself harmful tax competition.
It is, of course, within the right of any citizen to challenge the policy of his country in relation to EU rules.
It would be possible for someone based here to claim that a variation in the tax powers exercised by the Assembly was in breach of EU law.
But the experts felt that, if the Assembly exercised its tax-varying powers in line with the Azores case, this should mean that the EU Commission and the European Court of Justice would be unlikely to find against the Assembly.
The carefully considered views of the experts at the Westminster hearing offer a reliable resource for the decision-makers both at Westminster and Stormont on the issue of the devolution of tax powers.
Their conclusions on EU powers echo the findings of the Varney review some four years ago - that a carefully planned and implemented application of a reduced rate of Corporation Tax in Northern Ireland will find no obstacle from Brussels.