Is the proposed increase in the corporate tax rate relevant?
This week, Shell announced that it will be moving its tax residence to the UK. This is a huge vote of confidence for the UK as a destination for large international business. At a time when news made the headlines about the increase in the corporate tax rate from 19% to 25% in April 2023, this announcement is particularly welcome.
But to what extent is the corporate tax rate really relevant for companies in the choice of their location?
In 2010, following the 2008 financial crisis, the UK government released its Roadmap for Business Tax Reform. The roadmap included a plan to turn the UK tax system into an asset to encourage businesses to locate in the UK and reverse the trend for companies to have their headquarters elsewhere.
The roadmap outlined how UK businesses would be rebuilt by reducing the corporate tax rate, changing the UK tax base, improving tax administration and improving tax policy making. The corporate tax rate at the time was 28% and the roadmap called for the reduced rate that would lead the UK to success: 24%.
More than ten years later, with the corporate tax rate reduced to a flat rate of just 19%, businesses are now facing an increase of up to 25% from April 2023. Although it Just a percentage point lower than the 24% headline of the 2010, expectations have changed a lot. Will a 6% hike really push back UK businesses?
One observation is that the headline tax rate does not reveal how “carrot and stick” tax policy actually applies to businesses tax differently and by industry. The UK offers tax incentives to companies whose behavior promotes economic growth (carrots) and levies additional taxes on companies with broader shoulders or operating in sectors the government does not want to encourage.
In recent years, tax incentives for certain types of activities have become more generous, widening the difference in the effective tax rates faced by businesses depending on the industry in which they operate. companies.
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The annual investment deduction and the “Super Deduction” capital deduction favor capital intensive businesses. A host of different tax breaks for the creative sector are offered for film production, theater, orchestra, premium television, video games, children’s television and more. All of these measures effectively reduce the tax rate.
For other sectors, the use of the “stick” has been more obvious. Starting in April, large real estate developers will face the new tax on residential real estate developers, among other criminal tax rules already in place such as the stamp duty surcharge for additional properties and accelerated payment date. for disposals of residential properties.
The new economic crime tax is aimed at organizations that already have to comply with onerous anti-money laundering regulations, including financial and professional services and gambling companies. Banks continue to suffer from the direct debit, although a 3% reduction in the difference between the direct debit rate and the standard corporate tax rate was announced in the budget.
Despite the proposed future increase in corporate tax, the UK remains a preferred destination for international businesses. Language, common law system, time zone, labor law and workforce are among the many structural factors that contribute to a particularly attractive business environment.
From a tax perspective, a key advantage is that there is no withholding tax on dividends paid by companies, which means there is no income tax. repatriated to shareholders or parent companies. Dividends received by UK companies are generally also exempt.
The UK has an excellent network of double taxation treaties that allow withholding tax rates to be reduced or exempted under the terms of the treaty. The UK’s Substantial Equity Exemption provides a generous capital gains exemption on disposals of shares in commercial subsidiaries.
In addition to an already competitive offer, the UK recently announced several new measures which are clearly aimed at enticing businesses to come here. A consultation on the possibility of a ‘business re-domiciliation’ scheme to encourage businesses to move their residence to the UK was announced in the recent budget.
A new tax regime for asset holding companies, which came into effect from April 2022, is huge news for the hedge fund industry, encompassing – among others – private equity funds that offer essential investments in private companies.
Other new UK proposals unrelated to the tax system include significant new spending on innovation and favorable visa regimes for highly skilled workers.
Even though the UK adds 6% to the corporate tax rate, the proposed future rate of 25% is not out of place in a list of many popular corporate headquarters.
For example, the main corporate tax rates in Belgium and the Netherlands are 25%, and the Irish rate on passive income is also 25% (the headline of 12.5% only applies to commercial income). France has a main rate of 28%, or 31% for the largest companies. The United States is also expected to increase its rate to 28%.
The government continues to seek to encourage growth by carefully targeting key sectors and activities for UK offshoring. The rate hike to 25% is getting attention but should not discourage companies from coming to the UK.
Nick Blundell is a business tax partner at Moore Kingston Smith