Corporation tax: We weigh up the benefits and the pitfalls for businesses
A lower rate of corporation tax for Northern Ireland will result in job creation rather than "money in the pockets of fat cats", it's been claimed.
Eamonn Donaghy, the foremost campaigner for the Assembly to have business tax powers, said this week's passage by the House of Lords of legislation to lower the tax rate was an important milestone.
But Mr Donaghy said the move was merely "the end of the beginning" in the decades-long discussion over devolution of corporation tax powers, and that politicians now had to implement the Stormont House Agreement in full to keep their side of the bargain.
Mr Donaghy, head of tax at business advisors KPMG, said devolving corporation tax to Northern Ireland would help rebalance the economy away from the public sector.
He said the measure would create jobs - with estimates from the Department of Enterprise, Trade and Investment that a lower rate of tax would create 37,400 jobs by 2030 -down from predictions in 2006 of a 180,00 jobs bonanza.
"This is not about helping big business or putting money in fat cats' pockets - it's about rebalancing our economy, creating private sector investment and making Northern Ireland a better place."
And he said he disagreed with the argument that lowering corporation tax at an annual cost of £300m to the block grant presents too great a cost and jeopardises public services.
"We are seeing cuts to the public sector in any event so this gives us something to show for it."
According to a timetable set by the Treasury, a cut in corporation tax would come in force in April 2017.
The lower rate would then apply to profits made in the tax year ending March 2018.
Mr Donaghy said a lower rate of corporation tax would bring more investment from overseas companies into Northern Ireland.
He said he had also heard "anecdotally" of existing foreign direct investors in Northern Ireland who would increase their activities here in the event of a lower rate.
"You might have someone who might be manufacturing in Northern Ireland saying that they will now have further operations - such as research and development - with corporation tax reform."
Corporation tax across the UK will be set at 20% from next month following reforms announced by the UK coalition.
And Mr Donaghy said there was no likelihood that the measure would result only in enrichment of chief executives and company directors at the expense of their employees.
"In any event company directors who have money to spend are better off from a tax point of view reinvesting it in their companies," he said.
"I am sure there will be people who will go and buy new cars and new houses and you can't legislate for that but the vast majority want to reinvest in their business."
‘It helps, but the pool of talented labour will attract investors’
A reduced rate of corporation tax is not a ‘silver bullet’ that will save the economy, as investment in other areas is needed to lure overseas firms to Northern Ireland, it has been claimed.
It is argued that skills, infrastructure, political stability, and research and development (R&D) are all important factors in attracting foreign direct investment (FDI), and Northern Ireland can not rely solely on lower tax to bring in companies.
There are questions surrounding how effective the lower rate of tax will be in attracting FDI. The Republic of Ireland had a low rate from the mid-1950s, but did not see growth in FDI until the late 1980s when the rate was higher, business advisors PwC said.
Having the power to set its own rate of corporation tax will mean the loss of £300m per year for the Executive, as the block grant must be cut to make up the loss to the Treasury’s coffers.
In addition, under half (34,000) of Northern Ireland’s 70,000 Vat-incorporated businesses would be eligible for the lower rate. The success of a lower rate will be depend on “supply-side” policies, such as skills, infrastructure and communication, according to PwC.
Angela McGowan, chief economist at Danske Bank, said: “While low corporation tax may be a favourable element to our overall offering, it will also be the potential pool of talented labour that will attract and retain those valuable foreign investments.
“For investment purposes, firms favour macro economic stability and a fair degree predictability around taxes. But ultimately taxation is only one aspect of the investment decision. Labour costs, business rates, energy and insurance costs will all come into the mix — as will political stability, infrastructure and the skill levels of the local labour force.
“Indeed, firms often cite skills as one of the most important factors when exploring foreign investments.
“As the global economy becomes increasingly knowledge-based, advanced economies will find that their talent pool becomes the deal-clincher for the vast majority of investment decisions.”
PwC chief economist Esmond Birnie said that even if overseas firms move to the region, they won’t necessarily bring high-paying jobs.
“There is a debate whether Northern Ireland will be able to attract high R&D activity.”
He said companies with sigificant R&D activities “tend to have higher costs and lower profits, so are less attracted by lower profit tax”.
The devolved powers still have the pass the European Commission’s rules around State Aid.
In the event of devolution, the power cannot not be taken back by Whitehall, and all the tax losses must be paid for by Stormont.