John Simpson: The Tax Body Can’t Ignore Corporation Tax
The Northern Ireland Tax Commission, chaired by Paul Johnson, has opened what it hopes will be an important discussion about the potential for changes to the level and scale of different taxes here.
Are there changes to the rates of income tax, excise duty or VAT (or any other tax) that should be considered to improve the efficiency of the functioning of decentralization?
The newly appointed commission has a broad agenda: what change in the application of a particular tax would it recommend because of the expected consequences that could strengthen the local economy.
The challenge is limited. Any tax change, for example a specific reduction in income tax, would take place on the assumption of an offsetting reduction in some aspect of public spending.
The change should not have the effect of increasing the amount of financial support from the Treasury: tax changes should be offset by changes in local spending.
In recent years, the possible tax change that has received the most attention has been a proposal to reduce the corporate tax rate to (eventually) 12.5% so that Northern Ireland can compete with the lower rate. comparable to the Republic of Ireland.
Parliament in London had already legislated to make this possible, although no opening order was issued.
The proposal’s implementation plan was initially delayed due to the temporary suspension of the Assembly, and has now been displaced by a particular focus on pandemic relief efforts.
The arrival of the Tax Commission is, if the case remains valid, the opportunity to renew the planning for a change in the rate of levying corporation tax on local businesses.
It is therefore surprising that, in the context of the committee’s first comments, where it sets out a broader agenda on its emerging work programme, it concludes that “we, as a committee, will no longer consider tax on companies”.
The logic of this conclusion lies in the explanation offered, that “given the work already done, the scale and complexity of the issues, the need for action by the NI executive and of the constructive engagement of HM Treasury, we do not envisage…” etc. .
In other words, for a mixture of reasons, the corporate tax issue has been pushed to the bottom of a long list of possible tax changes.
The Tax Commission came to this negative conclusion after a detailed review of previous work that has taken place over the past 10 years or more.
There is a comprehensive review of the practical difficulties and some of the conceptual issues that were encountered in developing the original proposal.
The merits of corporate tax devolution accompanied by a lower tax rate have a credible story that garners positive support.
The commission makes an unconvincing suggestion when it argues that the evidence is somewhat dated and inevitably subject to uncertainty.
This conclusion might have been deserved if the circumstances of the corporate tax comparisons, north and south of this island, had changed radically.
One would think that the comparison of corporate tax rates has changed with the Irish government’s decision to bring its provisions in line with a major new international agreement.
OECD countries recently agreed to partially standardize corporate tax at at least 15% for the largest multinational companies while letting national governments tailor their own responses for other companies.
What is now clearer is that for the majority of businesses for which the Republic and Northern Ireland can hope to attract inward investment, the Irish rate of 12.5% will remain whereas, for Northern Ireland North, the British rate should now increase, over a short period, to 25%.
Whether the Republic rate is 12.5% and/or 15%, the gap will remain. The difference in taxation is more critical since businesses based in Northern Ireland will now be competing on the basis of continued participation in the EU single market under the operational rules of the EU-UK Protocol.
Of course, competitive outcomes are determined by much more than the incidence of corporate taxation, but the likely differences seem significant.
The corporate tax differentials are a continuing negative incentive affecting how Northern Ireland emerges in the post-protocol world.
This does not avoid the complex administrative and legislative implications of designing an appropriate coercive response for Northern Ireland.
Any agreement will need to be designed in such a way as to minimize distortions related to profit shifting or base erosion.
This represents a challenge for the Tax Commission. International expertise is available and could be applied to a difficult but solvable situation.
The commission sidestepped what should have been an unavoidable problem.