Belfast Telegraph

What next for corporation tax reduction debate in Northern Ireland?

Analysis

Taxing: Westminster will have a major role
Taxing: Westminster will have a major role

By John Simpson

What has happened to the popular proposals for Northern Ireland to introduce a regionally differentiated and lower rate of corporation tax? The issue seems to have disappeared from the political agenda and, possibly, the planning of Invest NI and senior civil servants.

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There are obvious problems with the move. With no Assembly, no local decision-making mechanism exists. Also, the post-Brexit rulebook is not yet determined.

After Brexit, would Northern Ireland have the freedom to make separate corporation tax policy decisions and, if the freedom did exist, would it be used?

The option will only exist if the terms of the Brexit departure leave this option open and if the Government still agrees that corporation tax rates can be devolved to Stormont.

The role of central government will be significant. In the recent past the delegated authority approved by Westminster was circumscribed.

Northern Ireland was to be allowed to set its own corporation tax rate but, under constraints agreed on state aid (the Azores EU ruling), financing the cost of tax revenue forgone was to be found by other expenditure reductions to leave Northern Ireland with no net increase in the funds allocated using the Barnett formula.

In addition, apart from a Northern Ireland tax rate, all the other rules and tax concessions in the UK system would be unaltered.

The arrangements agreed to introduce a separate Northern Ireland rate of corporation tax have stalled. While there was political acceptance - reluctantly by some politicians - the practical steps and timetable were not fully agreed.

The reticence from local political voices may have been a reflection of caution about how the Northern Ireland budget might be adjusted to deal with the financial consequences.

The passive response from the Treasury may have been based on concerns that the 'cost' in terms of the Barnett formula had been underestimated.

The Brexit debate and the collapse of Stormont have made the corporation tax debate almost irrelevant as an immediate practical question.

As the Brexit negotiations near a degree of finality, there are new influences that could reactivate the subject.

The withdrawal agreement (WA) makes provision for the possible continued application of state aid rules to Northern Ireland.

The WA is still under scrutiny, but there have already been government references which may mean that all of the UK (or, less likely, just Northern Ireland) will continue to respect the main state aid rules.

If so, Northern Ireland might revert to the ideas tabled over three years ago. That would be a constraint but, in terms of avoiding an unwelcome scramble to the bottom in competition for external investment, would also be a shared disciplinary mechanism.

In the complex post-Brexit debate, Northern Ireland will be influenced by the new multinational guidance on company tax incentives in the base sharing profit shifting guidelines (BEPS) now formally adopted by the Organisation for Economic Co-operation and Development.

These guidelines are a complex framework designed to influence competition between countries to attract investment and also to constrain the ability of multinational businesses to shift the incidence of corporate taxes by splitting businesses so that a proportion of profits are attributed to low-tax countries.

The influence of BEPS guidelines and the possible continued application of EU state aid rules are examples of a more orderly world market for international investment.

In principle, if the rules are observed, the competition to attract investments will draw less on fiscal subsidies and more on real competitive strengths. Productivity, skills, innovation and natural comparative advantage will become more influential.

From a Northern Ireland or Irish perspective, the serious scrutiny must test if these serious competitive strengths exist or are being developed.

Large (bigger than my neighbour) financial supports should give way to serious improvements in real comparative costs and resultant profitability. Is Northern Ireland confident and ready?

Belfast Telegraph

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