Belfast Telegraph

Stepping into the unknown

By John Simpson

Ministers and senior civil servants in Belfast and London now know the critical details of the difficult decisions as part of a package developed in HM Treasury that would allow corporation tax to be devolved.

Although a devolution proposal will need the support of MLAs, as well as all Westminster MPs, the information available now is inadequate for an informed debate on whether any of the options would be acceptable. Almost inevitably there will be a 'trade-off'. Regrettably, there is still no opportunity for interested stakeholders to comment.

Sammy Wilson, as Minister of Finance, has taken a lead in commenting.

His concerns about the balance of the costs, in terms of revenue forgone, and benefits, in terms of business investment and additional employment, are clear. However, the basis for his reservations needs to be better understood.

Business groups, including the CBI (NI), believe that the momentum of the decision making should be enhanced. Optimistically, progress would be seen to be made if the Chancellor of the Exchequer, in his Autumn Statement on December 5, included (even briefly) a positive statement of intent to introduce the necessary legislation during 2013.

If the Chancellor makes no reference to these issues on December 5, that will be disappointing.

What are the sticking points?

When the detailed proposals are made available (and the sooner the better) some of the difficult issues will be:

  • The expected costs falling on the Stormont budget both initially and cumulatively;
  • The adjustments to allow the Barnett formula to continue in amended form;
  • The rules to determine which businesses will qualify for lower corporation tax;
  • Admissibility of business conducted through external subsidiaries of NI businesses;
  • Admissibility of business conducted in Northern Ireland through subsidiaries of Great Britain parent cost;
  • The rules to counteract transfer pricing, or profit shifting, with related businesses outside Northern Ireland.

Then there will be complex questions on the attribution of the impact of the tax changes.

The logic of the Azores principles is that Northern Ireland will forgo any corporation tax which might have been subsumed by the Barnett formula.

Year by year, the UK subvention would be calculated to exclude what would have been this revenue through the UK Treasury. Presumably, a crude formulaic mechanism will be adopted.

The most contentious aspect of the operation of lower corporate tax rates lies in (what are termed) the second round effects.

The first round effects are forecast to be an increased inflow of business investment to (or within) Northern Ireland.

Investment and employment opportunities would increase. This would strengthen the local economy.

Also, as a first round effect, extra employees with added incomes would generate extra taxation for the Treasury. We would gain additional employment; the Treasury would earn more in taxation and, consequently, reduce the net subvention to Northern Ireland under the Barnett formula.

Northern Ireland Ministers, with support from the business community, have asked that, as a second round effect, some of the extra taxation being generated should be retained for Northern Ireland.

The Treasury could argue that the increased employment is what the scheme is aiming for and that, if it also reduces the already large subvention to Stormont that this is a useful gain for the whole UK economy.

Perhaps surprisingly, the Treasury have been persuaded that part of the increased taxation should remain with Stormont.

However, that may be a long-term gain accumulated over several years. In the interim, Stormont would need to take the pain of living with reduced public sector funding whilst the reduced corporation tax rates make an impact.

The corporation tax debate is not yet finalised.

Corporate interests are keen to gain UK-wide support, including in Scotland and Wales.

For the UK Government a large known unknown is whether the Scottish referendum will, or should, have any influence.

These decisions are too important to be taken without adequate public understanding.

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