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Response to HM Treasury consultation paper ‘Rebalancing the Economy in Northern Ireland’

By Eamonn Donaghy AND Michael Black

Extracted from Chartered Accountants Ireland and Chartered Accountants Ulster Society Submission Paper'Response to the HM Treasury consultation paper Rebalancing the Economy in Northern Ireland'

Introduction

  1. It has long been the view of Chartered Accountants Ireland, an Institute composed of members from Northern Ireland and the Republic of Ireland, and Chartered Accountants Ulster Society that a strong and sustainable local economy for Northern Ireland is an essential component in ensuring a better life and greater opportunities for all within our society. We believe that a strong economy more focused on the private sector has the potential to positively impact and bring great benefits to education, health, housing and social development for all the people in our region.
  2. For this reason we welcome HM Treasury's consultation paper as the key step in a drive to rebalance the Northern Ireland economy. As a particular issue, we have promoted a cut in the rate of Corporation Tax for Northern Ireland for several years, and we have taken a leading role in that debate both through our detailed responses to the two separate reviews carried out by Sir David Varney in 2007 and 2008 and, also in 2008, by writing to and appearing before the Northern Ireland Affairs Committee. More recently we also contributed a response to that Committee's inquiry into Corporation Tax in Northern Ireland.
  3. We realise that now is perhaps the clearest opportunity for such a major change in policy to take place. As an Institute and a District Society of professional advisers and business leaders drawing its membership from a wide range of organisations across all sectors of business life (public, private and voluntary alike) our members have the best interests of Northern Ireland in mind. The considered evaluation and judgment of our members can therefore make an extremely valuable and balanced contribution to this process and we therefore take this opportunity to present our views on the questions posed by the consultation paper.
  4. We have focused mainly on the taxation aspects and questions contained in Chapter 4 and in particular on the impact that a reduced corporation tax rate of 12.5% would have for Northern Ireland.

B. Specific questions

The Government set out the following tax specific questions in Chapter 4 of the consultation paper each of which we now address in sequence.

Specifically views are sought on the following matters:-

  1. The importance of the headline corporation tax rate in encouraging investment; and
  2. The extent to which a reduction in the rate of corporation tax in Northern Ireland could support additional investment, higher growth rates and increased employment in the Northern Ireland economy

We have responded to Questions 1 and 2 together as there are clear linkages between each.

  1. As an all-island body, Chartered Accountants Ireland has direct first-hand experience of the importance in the Republic of Ireland of a low headline rate of corporation tax in stimulating investment, higher growth rates and employment. Last August the Irish Department of Finance issued their periodical Economic Overview which, despite Ireland's ongoing economic difficulties, continues to cite their ‘favourable business tax regime’ as a key factor in having facilitated Ireland's economic success in the boom years.
  2. During 2010, despite these extremely difficult economic conditions, 78 new foreign and direct investments (FDI) projects were publicly announced by IDA Ireland which alone are expected to create over 5,800 jobs, an increase of 1,300 over the number of jobs created in 2009. To date in 2011, 17 new projects have been announced valued in excess of €582 million and expected to create over 2,220 new jobs. As recently as 10 May, Ireland's newly elected Government's Jobs Initiative announcement stated unequivocally that Ireland's low headline corporation tax rate is central to its industrial policy and remains an integral part of their strategy to encourage growth, attract FDI and increase employment.
  3. The performance reported for Northern Ireland in respect of FDI (drawn from the Invest Northern Ireland Annual report for 2009–10) is set out below;
    1. 1,875 FDI jobs promoted;
    2. of the above, 1,004 jobs had salaries of 25% above the Northern Ireland average (which was a reduction over 1,125 achieved the previous year)

Using this comparison, the number of jobs created from FDI in the Republic of Ireland is greater per capita than Northern Ireland with the trend in higher value jobs in Northern Ireland downwards. Crucially we would put forward that those created in the Republic of Ireland have a higher salary level (average salary for new inward investments reported as €43,000 per IDA Ireland's Annual Report) than those created in Northern Ireland.

Therefore, compared to the Republic of Ireland, inward investment jobs created in Northern Ireland are both lower in volume and in quality. It is our opinion that in respect of high value projects, tax is a very important factor, compared to lower value projects where cost is of greater importance. Therefore, while Northern Ireland is competitive with the Republic of Ireland across many factors, crucially, higher corporate tax is a weakness in respect of higher value added investments.

In their report, IDA Ireland state that among other factors, a “competitive tax regime” is a key reason for inward investment and we are strongly of the view that while Northern Ireland may “compare favourably” with the rest of the UK in inward investment terms, that comparison fails to compare the actual performance with the potential.

  1. There are some key and unique issues that apply to Northern Ireland that need to be highlighted:
    • Northern Ireland is the only part of the UK that borders another EU country and that country has a corporation tax rate of 12.5%;
    • Under the current proposals to reduce corporation tax in the UK as a whole, the end result will be a final resting point of 23%, anticipated to commence 1 April 2014. This is three years away and will still leave Northern Ireland with a tax rate of nearly twice that of the Republic of Ireland;
    • From 2013, Northern Ireland faces a significant restriction on its ability to offer Selective Financial Assistance (grant aid) which has been one of the mainstays of attracting FDI into Northern Ireland over the last 30 years;
    • Northern Ireland lacks the large domestic market needed to attract major international firms;
    • Even if Northern Ireland was not in this unique position, the lower rates of corporation tax in many other EU countries would continue to place us much lower down the list for the decision makers of inbound investments.
  1. Chartered Accountants Ulster Society carried out a survey of its members earlier in 2011 and 70% of respondents indicated that the ability of the Northern Ireland Assembly to reduce the rate of corporation tax was a vital requirement for the future growth of the NI economy.
  2. Chartered Accountants Ulster Society also recently worked with Invest Northern Ireland to assess the view of overseas investors on the potential impact of a reduction in the rate of corporation tax in Northern Ireland and the results of that work are below.

Invest NI asked a number of existing and potential overseas investors two specific questions as follows:

  1. How important is tax to your international investment decision making?
  2. Could you give us an indication of what impact a reduction in corporation tax rates from 27% in 2011 to 12.5% within the next 3–5 years would have on your investment intentions? How would it affect the likelihood of setting up/expanding your operations in NI?

Feedback arose from discussions in the context of wider meetings, however whilst the results obtained were not drawn from a large sample, they nevertheless confirm the already held view that tax is an important factor for investment location decisions. The specific impact of the headline corporation tax rate on investment decisions will vary according to the individual parameters of each investment project.

This particular exercise, given the current consultation, was an effort to quantify interest from a variety of existing and potential investors.

Herein follows a summary of the responses received:-

Number of responses – 31

Comprising: Existing investors – 10

Prospective investors – 21

  1. How important is tax to your international investment decision making?
    76% of all respondees stated that tax was important or very important to their international investment decision making.
  2. Could you give us an indication of what impact a reduction in corporation tax rates from 27% in 2011 to 12.5% within the next 3–5 years would have on your investment intentions? How would it affect the likelihood of setting up/expanding your operations in NI?
    68% of all respondees stated that a reduction in corporation tax to 12.5% would somewhat increase/significantly increase the likelihood of them setting up/expanding their operations in NI.
  • Splitting out those that said it would have a significant impact: 32% of all respondees stated that a reduction in corporation tax to 12.5% would significantly increase the likelihood of them setting up/expanding their operations in NI.
  1. Therefore we believe that, based on historical experience in the Republic of Ireland, the specific economic and taxation factors outlined above applicable to Northern Ireland, the views of the members of Chartered Accountants Ulster Society and the research carried out by Invest Northern Ireland on behalf of Chartered Accountants Ulster Society, that a reduction in the corporate tax rate in Northern Ireland would be a significant stimulating factor in the creation of higher value jobs and a central plank in the drive to attract investment to the region by putting the local economy on a higher growth path for FDI and bringing additional investment from indigenous businesses.
  2. Research by bodies such as the OECD also points to the importance of low corporate tax rates to encourage growth in small open economies, such as in Northern Ireland.
  3. The Irish Department of Finance recently commissioned Ernst & Young to carry out a study on the economic and budgetary impact of introducing a Common Consolidated Corporate Tax Base (CCCTB) in the European Union. Whilst the report deals specifically with CCCTB, it too is supportive of the positive impact a lower effective corporate tax rate would have on growth, investment and jobs.
  4. The Republic of Ireland experience clearly demonstrates it can be expected that the proportion of additional investment from indigenous companies increases at roughly the same rate as FDI investment with some estimates suggesting that every job created by FDI sustains two to three more jobs indirectly.
  5. In his first major speech the (then new) UK Chancellor George Osborne spoke to the Confederation of British Industry about making the UK a more competitive place, from a tax perspective, to do business. This was followed by the November 2010 launch of the Government's ‘Corporate Tax Road map’ with a timetable for rate reductions amongst other measures. Budget 2011 also saw from 1 April this year a further 1% rate reduction in corporation tax to 26% from the anticipated 27% rate announced last June. All of these are very clear signals that the importance of a low headline rate of corporation tax is recognised by the UK government itself.
  6. Research conducted by the Northern Ireland Economic Reform Group last year also looked to projecting the additional investment (both FDI and indigenous) and quantum of potential jobs which would flow from a 12.5% corporation tax rate, supported by appropriate measures to retain and attract skilled workers. Whilst there can be no certainty over the likely flows, the research does provide support for a strong correlation between a low headline corporation tax rate and FDI flows and job creation. As many as 80–90,000 jobs are cited as flowing over a 20 year period.
  7. Further studies, such as that from the Economic Advisory Group would appear to bear this suggestion out.
  8. It also speaks volumes that the UK Government has not fallen into the same trap as some other EU countries who continue to seek to pressurise Ireland into increasing its corporation tax rate on the basis of unfair tax competition. As contributors to the EU/IMF loan pool, the UK has rightly recognised the merits of maintaining this low rate as central to Ireland's industrial policy and an integral part of its international brand in seeking economic recovery.
  9. It should be noted that Foreign Direct Investment decisions can take time to come to full fruition. Nevertheless, a public commitment this year by devolving the power to vary corporation tax to the Northern Ireland executive enabling a rate reduction at a defined future date would in itself have a positive bearing on the attractiveness of Northern Ireland as an investment location. The timing of the implementation of the reduced rate, and how the change would then change be marketed internationally are then worthy of scrutiny in their own right.
  1. The estimated costs arising from a lower corporation tax rate in Northern Ireland
    1. Following the ECJ'S findings in the ‘Azores’ case, the clear requirement is that the impact of any reduction in corporation tax receipts arising from a reduced rate of corporation tax in Northern Ireland must be incurred by the Northern Ireland Assembly (NIA). Rigorous compliance with the Azores requirements should result in no cost accruing to tax payers in the rest of the UK.
    2. We would also point out that there could be no overall loss to the Northern Ireland economy of reducing the rate of corporation tax. The reduced tax receipts will result in effectively moving funds out of the public sector (in the form of a reduced NI Block Grant) and into the private sector (in the form of reduced corporation tax liabilities) and these additional funds could be expended on further local spending/job creation. Indeed by its very nature this policy will help to ‘rebalance’ the current NI economy in monetary terms.
    3. As recognised in the consultation paper it will be necessary to determine with more certainty the costs arising from loweringthe corporation tax rate. The actual fiscal cost to the Northern Ireland Executive (NIE) of reducing the corporation tax ratewill need to be assessed in more detail based on a methodology agreed between the NIE and HM Treasury. We would advocate that HM Treasury carry out the necessary analysis as soon as possible so as to enable the NIE to have the appropriate data to determine how, when and over what period the rate of corporation tax can be reduced.
    4. The estimated costs presented in tables 4A and 4B of Chapter 4 can of course be used to inform the discussion, but do not represent definitive final costs. An exercise needs to be undertaken to determine the costs with some more certainty to include forecasting outturns under differing scenarios and also to include more detailed forecasts of phasing-in the rate reduction and only applying the reduced rate to trading profits.
    5. We would point out that the impact of phasing in a reduction in the rate of corporation tax would reduce the cumulative loss in corporation tax in the initial 5 years from £1,140m (table 4A) to £330m (table 4G), thus creating a saving of over £800m. Whilst the mechanics of implementing a reduction in the rate of corporation tax would be a matter for the NIE, the impact on the early year costs of a phased-in reduction would be very significant.
    6. The potential loss of corporation tax should be considered in the context of the annual NI block grant, currently almost £12bn per annum. The average direct cost from Table 4A is £228m for the first 5 years-this is less than 2% of the NI block grant. The average direct cost from Table 4G of £66m for the first 5 years is just over 0.5% of the NI block grant. We would therefore contend that the estimated direct cost effects are appropriate amounts to invest into the future economic growth of the NI economy.
    7. The analysis of the behavioural impact of profit shifting and tax motivated incorporation also requires some reworking. It is not clear from the consultation paper if the estimates for profit shifting take any account of transfer pricing legislation in other countries. Tax Motivated Incorporation (TMI) results in tables 4C and 4D show a net £50 million fall in tax receipts by year 5. Again we stress the need for more certainty on these figures.
    8. We would also question whether the data in tables 4C and 4D takes into account the announcement by the Chancellor at the last Budget that the 50% top rate of income tax is a temporary measure, though no date has yet been set to reduce this.
    9. A number of years back the UK had a 0% corporation tax rate for profits up to £10,000 with a 19% small company rate and this differential between corporate and income tax rates resulted in a flurry of incorporations by self-employed businesses and individuals. It may be possible to assess with a little more certainty the behavioural outturn from TMI using the actual data available from this time period.
    10. Whilst there may be several types of economic analysis which could be carried out to address the potential behavioural impact of a lower corporation tax rate on TMI, perhaps a simpler and equally effective approach would be to look at historical experience in the Republic of Ireland.
    11. The figures below are taken from Republic of Ireland tax data at three distinct points in time and looks at the proportion of Corporation tax returns filed in relation to the proportion of Income tax returns filed.

      YEAR

      2000

      2005

      2010

      Corporation tax (CT) rate

      24%

      12.5%

      12.5%

      CT YIELD (€bn)

      3.2

      6

      4

      CT RETURNS (k)

      79

      114

      138

      Highest rate of income tax

      46%

      42%

      41%

      Income Tax RETURNS (k)

      288

      434

      538

      CT RETURNS as% of TOTAL RETURNS FILED

      22%

      21%

      20%

    12. The above figures (taken from the Annual Reports of the Revenue Commissioners) illustrate that there was no significant migration from self-assessment (self-employed) income tax activity to activity through corporate vehicles. If there had been, even allowing for the expansion in the Irish economy over most of the period, one would expect to see corporation tax returns growing as a percentage of the total of income tax and corporation tax returns filed. This was not the case.
    13. In addition, the Close Company tax regime in Ireland is designed to ensure that there is no advantage purely from a tax perspective to incorporating a business. This is achieved by:
      • Applying a Corporation Tax surcharge when undistributed investment and rental income accumulates in a close company; and
      • Applying a similar charge to professional services income undistributed in a corporate vehicle.
      These measures could equally be applied to any reduced rate corporation tax regime in Northern Ireland to mitigate the potential impact of TMI and in fact one could argue that these particular provisions have worked in Ireland to very successfully deter TMI at a time when the corporation tax rate was falling as a proportion of income tax.
    14. We conclude on this question by noting:
      • that the loss of corporation tax receipts will effectively transfer funds from the Public sector to the private sector;
      • that rigorous compliance with the Azores requirements should result in no cost accruing to the tax payers of the rest of the UK;
      • that in the context of the NI Block grant, the lost corporation tax has a maximum average impact of less than 2% of the overall block grant over the first 5 years; and
      • that the impact of TMI would appear to be overstated.
  2. The dynamic impacts on tax receipts arising from a lower corporation tax rate in Northern Ireland
    1. We are wholly in agreement that it will be necessary to establish the dynamic impact on tax receipts arising as a result of additional VAT, excise duties, PAYE and national insurance and additional corporation tax from investment benefits accruing. It would also be important to consider if reduced social security and welfare costs could be included as dynamic impacts of the reduction in the corporation tax rate.
    2. The ‘net’ cost approach i.e. the net loss to the UK exchequer should be the basis on which any adjustment to the NI block grant is made, subject to agreeing the methodology for this. This is clearly allowable under the Azores principle. It would be unfair to base the block grant adjustment solely on corporation tax outturns given the dynamic impact a rate reduction would almost certainly have. We do however accept that this is of course subject to the final agreement of the EU Commission.
    3. The potential impact on dynamic receipts could more closely be assessed by looking at the experience of the Republic of Ireland over the last decade as a basis for a more defined assessment of the impact on tax receipts but this should be based on final policy design.
  3. The risks to the Northern Ireland Executive arising from a devolved corporation tax rate in Northern Ireland
    1. Risk only arises from a devolved corporation tax rate in Northern Ireland as a result of how the process to reduce the rate is designed, implemented and managed; there is no risk inherent in devolving the power to vary the rate of tax. This can be likened to an investment decision requiring solid and sensible risk management strategies. The consultation process is the first key step in this risk management process.
    2. For the avoidance of doubt we are completely opposed to the reduction of the rate in corporation tax being used as a means of turning Northern Ireland into a tax haven. We would therefore be willing to engage in any consultations necessary towards ensuring robust and proportionate legal mechanisms are established which would ensure that opportunities for tax arbitrage for unhelpful tax competition reasons are eliminated.
    3. The decision by the NIE as to whether or not to reduce the rate of corporation tax is akin to investment decisions governments and companies make on a daily basis. In today's business environment, risk management is a day to day operational issue. A detailed risk management initiative should form part of the design and implementation of any rate reduction policy in order to manage that risk positively.
    4. In our view, the real risk for the NIE is to allow Northern Ireland to continue to operate as a chronically lagging economic region, whose main means of attracting FDI is selective financial assistance which is shortly to be severely curtailed. Indeed the most recent report from the Economic Advisory Group clearly states that the ‘base line’ or ‘do nothing’ option results in Northern Ireland continuing to lag behind the rest of the UK with little or no convergence in living standards.
    5. The clear alternative to that risk is making the investment in a reduced rate of corporation tax and striking out boldly in a new direction which offers the strong prospect of a much more rewarding economic future for all. This alternative does come at a price to the NI block grant (although in reality this price is a diversion of funds from the block grant to the private sector) but one which can clearly be managed.
  4. The potential compliance costs and administrative burdens for business arising from a devolved corporation tax rate in Northern Ireland
    1. It is suggested that the introduction of a Northern Ireland specific corporation tax rate could result in additional compliance costs and administrative burden on business over and above their current administrative and recording requirements. These costs would result from the need to separately identify and record profits arising in this region but this is likely to be the case mainly for companies located in multiple jurisdictions only and not those solely based in Northern Ireland. Such companies are likely to be already conducting such an exercise e.g. a Northern Ireland company with a branch in the Republic of Ireland must separately identify trading activity arising in each country both for the purpose of completing its Irish corporation tax return and for the calculation of the UK double tax relief position.
    2. In any event, should the administrative burden on businesses availing of a lower corporation tax rate arise from the need to complete, for example an additional supplementary corporation tax returns form similar to those already required for Loans to Participators, Controlled Foreign Companies and Charities amongst others, such additional burden is unlikely to cause significant hardship to companies which will at the same time benefit from a lower rate of corporation tax and a stronger Northern Ireland economy.
    3. We would expect that under the Government's new tax policy making approach, impact assessments will be carried out to be published with any draft regulatory proposals, with a final/implementation stages impact assessment undertaken when the new legislation is laid out.
    4. Following the recent initiatives to progress e-filing in the UK by introducing iXBRL online filing for corporation tax returns, the necessary compliance infrastructure is largely in place to deal with the introduction of a different corporation tax rate for this region.
    5. We are unable to comment on Treasury's estimate of £50m as the cost to business of introducing this policy measure other than to say that it appears to be rather a significant sum for a policy that is unlikely to apply to many businesses based outside Northern Ireland.
  5. The approach that would be taken to adjust the block grant arising from a devolved corporation tax rate in Northern Ireland
    1. The key issue is that any adjustment to the block grant needs to be compliant with the ECJ ‘Azores’ ruling. It will therefore be necessary to seek the approval of the EU Commission on any adjustment proposal.
    2. In parallel with the requirement to be compliant with the EU Commission, the approach to be taken would essentially be one driven by the political process and would necessarily be subject to careful review and negotiation so it is difficult to be prescriptive in how such an approach should be formulated.
    3. We are also concerned that should the NIE be unable to determine the adjustment approach without the involvement of the UK Government, this intervention itself could potentially fall foul of the 3rd Azores condition of fiscal/economic autonomy. However we believe that early and clear consultation with the EU Commission should prevent this matter from being an ultimate impediment.
    4. We would once again stress that the block grant adjustment should be the ‘net’ tax cost arising being the lost corporation tax net of additional dynamic tax receipts.
    5. Again we re-emphasise that rigorous compliance with the Azores requirements should result in no cost accruing to the tax payers of the rest of the UK.
  6. The balance of potential costs and benefits of a reduced corporation tax rate in Northern Ireland.
    1. Table 4F provides a neat summary of the expected costs and benefits of a reduced rate. We note that it does not mention the direct corporation tax receipts which would arise from additional investment by both new and existing businesses. We would also point out that the re-energising of the private sector would have a positive dynamic effect on the public sector which would see benefits from a number of perspectives.
    2. The costs outlined in table 4F can be reduced by carefully planning how any rate reduction is planned, implemented and administratively managed on an annual basis, using a combination of risk management and timely annual reviews of outturn data.
    3. As already noted, the main direct ‘cost’ of this policy will be a shift of funds from the public sector block grant to the private sector, which in itself causes a rebalance of the current NI economy. However the ‘cost’ of the ‘rebalance’ will be a reduction in the NI block grant with no net cost to the Treasury.
    4. We are of the view that this policy, the quantum of which in terms of the NI block grant is a small percentage of the annual NI subvention, is a very cost efficient means of enabling the NI economy to become more balanced by promoting the growth of the private sector via increased FDI and the creation of more indigenous growth.
  7. The merits of a deferred implementation of a rate reduction in Northern Ireland and its potential impact on investment decisions.
    1. We would advocate that there is no deferral of the devolution of corporation tax varying powers to the NI Assembly as the availability of such powers would in itself send a very powerful signal to the global FDI community.
    2. However the deferral of actual implementation of a rate reduction would allow Northern Ireland to ‘set out its stall’ to potential investors. This would also facilitate more detailed work on data collection in terms of the potential impact on tax revenues. The potential additional compliance and administrative burden could also be assessed with more certainty but it would be necessary for final details of the policy design to have been agreed upon at that time. To provide certainty to prospective investors, a clear timetable should be set at the outset of when the rate reduction would occur. However deferral would probably have a negative impact on FDI given falling tax rates in other regimes and the ongoing correlation between low tax rates and investment location decisions.
    3. As previously mentioned, Northern Ireland is facing the removal of its ability to provide grant assistance and thus we would not be in favour of an extended deferral policy. If the deferral route is pursued we would not be supportive of coupling this with a further phase in period as that would simply create too long a delay – action is needed now.
  8. The extent to which a phased reduction in the rate of corporation tax in Northern Ireland could support a rebalancing of the economy while allowing the costs of the reduction to be more effectively managed.
    1. There is little doubt that a phasing in period would allow more effective management of the costs and risks involved in a rate reduction and would be a sensible decision. As noted already, the impact of phasing in a reduction would reduce the cumulative loss in corporation tax in the initial 5 years from £1,140m (table 4A) to £330m (table 4G), thus creating a saving of over £800m. Whilst the mechanics of implementing a reduction in the rate of corporation tax would be a matter for the NI Executive, the impact on the early year costs of a phased in reduction would be very significant.
    2. Again this would necessarily need to be set to a clear timetable at the outset to create certainty for potential investors with a scene setting marketing campaign sending a clear message that Northern Ireland is ‘open for business’.
    3. As part of this message of certainty, the NIE should state its unequivocal intention to implement the phased reductions. This would enable packages of investment from existing FDI companies to be mobilised more quickly.
    4. The rate reduction could be set over a staggered period with each subsequent phase of reduction set to a clear timetable so that companies concerned with phasing in are settled in the region and making profits whilst the tax rate is reducing and finally settling to 12.5% at a defined point in time.
    5. If the lower tax rate is phased in, the cost of doing so too would also be correspondingly phased in spreading the perceived risk over a number of years ‘investment’ period.
    6. We would also point out that we are not aware of any country worldwide that has seen an immediate marked reduction in their corporation tax rate without moving to this position on a phased basis.
    7. Therefore we support a phasing in approach.
  9. The impact that restricting any reduction in corporation tax receipts to trading income only would have on the aim of rebalancing the Northern Ireland economy and the value for money of a corporation tax reduction.
    1. We note the suggestion of the Consultation Document that by restricting the rate reduction to trading receipts only, the impact of the rate reduction might be reduced by as much as £85m. On first principles, we anticipate that this is a conservative estimate.
    2. Restricting the reduced rate to trading profits only would encourage investors to locate trading and manufacturing divisions in the region which would support job creation flows from the new investment. It would also help to prevent Northern Ireland becoming a ‘tax haven’ for non-trading investment activities.
    3. The consultation document also moots a scenario that there would be considerable scope for companies to limit the amount of losses that they claimed against Northern Ireland trading profits and offset them against profits arising elsewhere. This can be dealt with by introducing ‘value basis’ rules to trading losses similar to the rules that operate for trading losses in the Republic of Ireland. These rules would seek to restrict the ability to use NI trading losses against both other NI trading/non-trading income or for group relieving within or outside NI.
    4. Therefore we support a reduced corporation tax rate only applying to trading income, and we do not believe that such a restriction would have a negative impact on the views of inward investors.
  10. Whether there are other options to offset the cost to the NIE of a reduction in the rate of corporation tax that would be consistent with the overall aim of rebalancing the Northern Ireland economy.
    1. If there is an overall loss of corporation tax as a result of reducing the tax rate in Northern Ireland and this is not covered by the secondary dynamic tax receipts (for example greater PAYE/NIC/VAT etc) then it will be a matter for the NIE to decide how this is to be financed. This could be by means of increasing sources of revenue in Northern Ireland from the business community or by finding administrative savings in the running of government or public services. Whilst we would be willing to assist the NI executive in this process, we do not believe that it would be appropriate to outline options until the net cost has been appropriately determined.
    2. In the context of this question, it is important to note that the essence of a low corporation tax rate is that it provides the incentive to earn. All other incentives, tax based or otherwise, create an incentive to spend. This is why a low tax rate is not comparable with other forms of tax incentive and why we do not believe that these measures will give rise to a damaging cost.
  11. The extent to which changes to R&D tax credits, annual investment allowance, training credits or a national insurance holiday could provide feasible, effective, affordable and value for money support for the rebalancing of the Northern Ireland economy.
    1. Whilst such measures would be helpful, particularily to local companies, we do not believe that they alone would provide a significant incentive and support for rebalancing the economy in inward investment terms. As it currently stands, the UK R&D tax credit regime has already been enhanced on a number of occasions over the last few years, coupled with a progressive marketing campaign by HMRC. Annual investment allowances of £100,000 are in place up to 1 April 2012 (when they reduce to £25,000) and Northern Ireland also had a 100% capital allowances rate on plant and machinery for the period May 1998 – May 2002.
    2. None of these measures created any significant change in Northern Ireland's economic status and we have no reason to believe that the alternative measures cited in Chapter 4 would be any different. We do not dismiss these as being without value but see them as offshoots of a lower headline corporation tax rate needed to provide key profit and earnings stimulus in this region as opposed to these measures which would otherwise create an incentive to spend.
    3. We would point out that the R&D tax credit scheme is at least as attractive as that available in the Republic of Ireland today and hence our conclusion is that it is not a major factor in influencing inward investment.
    4. Furthermore, short term measures e.g. national insurance holiday are of only minor importance to an inward investor who is planning on an investment for the long term.
    5. ICT investments, which comprise a high proportion of inward investment in R&D, are comparatively low on capital expenditure and so investment allowances are of limited value.
    6. We would also point out that if the NI Assembly were to seek to implement such tax incentives, it would almost certainly be deemed a state aid by the EU.
    7. The ‘Patent Box’ legislation to be implemented across the UK is a worthwhile initiative and will be of assistance to NI companies.

C. Conclusion

  1. In summary, Chartered Accountants Ireland and the Ulster Society are fully supportive of a proposal for the devolution of power to the NIE to vary and ultimately reduce the corporation tax rate in Northern Ireland to a lower level such as 12.5%, as the key strategy to rebalancing the Northern Ireland economy. We welcome this consultation document as part of that process.
  2. The recent report from the Economic Advisory Group set up by the NI Minister for Enterprise, Trade and Industry concludes that a reduction in the rate of corporation tax is the best long term economic policy for Northern Ireland to pursue. We would echo that conclusion.
  3. The Institute's Council continues to put forward its support for a 12.5% headline corporation tax rate for Northern Ireland. The proposal to reduce the rate of corporation tax is a central plank of a strategy required now to rebalance the Northern Ireland economy and address the need for significant growth in the private sector.
  4. Whilst the debate on this issue has been ongoing for over a decade, we advocate that action is needed this year on the way forward. This should be by way of devolving the power to vary the rate of corporation tax to the NIE as soon as possible.
  5. We also view a reduction in the rate of corporation tax as an economic policy which is entirely consistent with the ‘Priorities for Growth’ as set out in section 3 of the Northern Ireland Executive's ‘Consultation on Priorities for Sustainable Growth and Prosperity’ and in particular 3.8 of same which states as follows:-

“The Economic Strategy will be central to the delivery of our overall strategic aim of an economy which increases wealth and employment opportunities for all. Our vision for the Northern Ireland economy of 2020 is for it to be characterised by a sustainable and growing private sector, with a high-skilled, flexible workforce working in high productivity, innovative firms which compete in global markets.”

  1. In parallel with devolution of the power to vary the rate of corporation tax, a detailed cost benefits analysis needs to be undertaken factoring in all potential options including a phase-in period, inclusion of the positive impact of FDI flows on corporation tax and other dynamic tax receipts and the potential exclusion of non-trading profits. Once completed, we advocate there is a strong possibility that the loss of corporation tax from a rate reduction can be carefully managed to such an extent that the net costs become neutral. In that scenario there is no doubt that a rate reduction should be planned for.
  2. Our recommendation would be for a phased introduction of the 12.5% rate set to a clearly defined timetable with profits from passive or non-trading activities excluded from this lower rate. We would further recommend consideration also be given to enhancing close company legislation in NI in a similar manner to the Republic of Ireland's close company surcharge legislation which so clearly has worked as intended by deterring TMI. The inclusion of ‘value-basis’ rules for utilisation of trading losses will also be important.
  3. A lower corporate tax rate should not be considered a “silver bullet” for economic growth though, and for success we consider a number of other matters are important, including;
    1. a. A clear plan on skills development, encompassing the growth in the number of “employer ready” graduates and the attraction of overseas talent to Northern Ireland; and
    2. b. A comprehensive long term overseas marketing programme for “NI plc”. To draw a business paradigm, any new product launched by a business would require a significant marketing and sales investment. Northern Ireland currently has a comparatively modest overseas sales presence and this should be augmented in key markets.
  4. Chartered Accountants Ireland and the Ulster Society are committed to playing our part in creating a sustainable and successful economy in Northern Ireland and we are willing to offer the expertise and experience of our membership in assisting with any aspect of economic development. We hope that the views herein will be welcomed as an honest and constructive contribution to this important consultation.
  5. As a concluding comment we would point out that the 5 year average cost of reducing corporation tax to 12.5% represents 2% of Northern Ireland's block grant if implemented immediately and only a 0.5% of the block grant if phased in over 5 years. In the context of the transformative potential to be achieved from a reduced rate, this is a very small price to pay.

Eamonn Donaghy Chairman of the Northern Ireland Tax Committee of Chartered Accountants Ireland

Michael Black Chairman of Chartered Accountants Ulster Society