Corporation tax regime seen as serious competitive disadvantage

A call last week by a US business delegation for the British government to match generous Southern corporate tax rates in the North echoes other recent complaints from the North over the competitive edge conferred on the South by its tax regime.

But the truth is - as the outgoing EU Commissioners for Competition and the Single Market implicitly made clear last week - that short of reducing all British corporation taxes to the Irish rate, or devolving real taxation powers to the North, there is little London can do about the situation under current EU rules.

Take the parallel case of the Mezzogiorno, the poor southern region of Italy, where growth and employment rates continue to underperform in comparison to the booming north.

Following a vote in the Italian Parliament recently, the government wrote to the Commission on August 31st to ask whether it could levy taxes on companies in the north and south at different rates, to give the Mezzogiorno an edge in attracting investment.

No chance, was the not unexpected gist of the reply last week from Commissioners Mr Karel van Miert and Mr Mario Monti, who is now taking over the former's Competition job.

Their joint letter to Rome explains that any such differential regime would fall foul of two key, related aspects of EU policy: firstly, severe restrictions on confusingly titled "regional aids" (in fact, state grants to industry, including fiscal aid), and, secondly, the "voluntary" code of conduct on "harmful" corporate tax competition, which prevents sectorally or geographically-limited tax breaks for business within member-states.

In the former case, the Commission has recently tightened up its regulations governing state aids, allowing capital injections into businesses only when they are specifically targeted at creating jobs in disadvantaged areas. Support for day-to-day running costs, or "operational aid", is now prohibited. Any untargeted, regionally-based fiscal regime, such as that for the Mezzogiorno or Northern Ireland, would thus be blocked by the Commission.

"A fiscal arrangement which reduced the running costs of businesses, without being specifically connected to new investments or job creation, would constitute operational aid, which is in principle prohibited," the letter says.

As for the code on corporate tax competition, it is currently being policed by a committee of the member-states, the Primarola Group, which is due to report later this autumn on the status of some 250 regimes operating throughout the EU. But the code has already forced the Republic to phase out the privileged status of the IFSC in favour of a far more costly common corporation tax regime.

Clearly, then, London would have difficulty - even given the improbability of its wishing to do so - in reducing corporation tax in the North alone.

But, responding to journalists' questions, Mr Monti made clear last week that his letter was not to be seen as calling into question the fiscal autonomy of the Basque and Navarre regions inside Spain. Both regions have enjoyed the right to raise and vary taxes independently of Madrid for several hundred years.

Although both special regimes are currently among those being investigated by the Primarola Group, sources in the Commission regard it as inconceivable that they would be called into question, as regional autonomy is an internal matter for member-states.

How much fiscal autonomy a region would need in order to be granted an exemption is unclear and may be clarified by Primarola. But what is clear is that in order to compete on company tax rates with the Republic, the new Northern Assembly, when it begins to function, would certainly need a dramatic extension of its current competences. The same is true of Scotland, although it does have a limited right to levy taxes.

Yet growth is being stifled, inward investment opportunities are being lost and jobs are migrating across the Border, according to a report published by the Newry and Mourne Co-operative at the beginning of the month. The report says the Border counties are now at a "serious competitive disadvantage".

If EU rules are to be complied with, a more radical political devolution agenda may be what Northern Ireland's business community will have to aim at.