Tax rate change would come at a price
FORGET THE fiscal treaty debate because a new challenge to Ireland’s low rate of corporation tax might just be about to materialise on its doorstep.
There is an air of expectation in Northern Ireland that its days of coveting the Republic’s tax levels might be drawing to a happy end – treaty or no treaty.
Nothing is written in stone yet, but if upbeat murmurings are to be believed, then the UK government may be inclined to give the Northern Ireland Executive Committee the power to set its own corporation tax rate.
There has been a sustained campaign in the North to persuade the UK treasury that the fastest way to “rebalance” the local economy, attract new investment and generate jobs is by lowering the rate of corporation tax, which is currently at 24 per cent.
The general consensus is that Northern Ireland should at the very least match the Republic’s 12.5 per cent rate.
The UK treasury has promised that a decision on whether corporation tax should be devolved or not will be “made by the summer”.
In the meantime, there has been a flurry of activity to convince political leaders at home and at Westminster to back the campaign to secure a reduced rate.
Grow NI, the umbrella business organisation which has spearheaded the tax reform crusade, has unveiled a “Pledge for Prosperity”.
Eamonn Donaghy from Grow NI and head of tax at KPMG Belfast says the pledge represents an undertaking by businesses in the North to do “everything in our power” to create employment and prosperity.
Grow NI wants all of Northern Ireland’s politicians to sign up to the pledge.
Donaghy says: “Devolving and reducing corporation tax will ensure the region is freed from over-reliance on public sector spending and means we can genuinely rebalance our economy.”
He argues that although there will be a price to pay if the Executive gets the power to set local corporation tax levels, it will be worth it.
Under European Union rules, the North will have to shoulder the cost of reducing the tax rate.
What this means is that it would suffer a cut in the block grant it receives from the UK Treasury each year.
The “fiscal consequences” of the devolution of corporation tax could in theory cost Northern Ireland £145 million, according to the lowest UK treasury estimates, or up to £400 million based on worst-case scenarios.
Donaghy believes the cost of reducing corporation tax would “pay for itself many times over during the next couple of decades”.
“The possibility of getting something for nothing would be very attractive, but a reduction in the rate of corporation tax in Northern Ireland cannot be one of them,” he says.
“In effect, the upfront initial costs should be seen as an investment in Northern Ireland’s future rather than as an irrecoverable cost.
“Indeed, even the upfront costs should be seen as a small proportion of the overall subvention that Northern Ireland receives from the UK treasury, and funding these costs should not cause material hardship to the running of Northern Ireland,” Donaghy adds.
The Confederation of British Industry (CBI) in the North also agrees.
At a recent CBI Northern Ireland Westminster reception in London, its local chairman Ian Coulter said people in Northern Ireland wanted “to reduce their dependency on the exchequer and overdependence on the public expenditure”.
But its parent body, the London-headquartered CBI, does not agree with the views of CBI Northern Ireland when it comes to devolving corporation tax.
It states that while it “recognises and shares Northern Ireland’s ambition to rebalance its economy”, it maintains that “the interests of the UK are best served by a unitary corporation tax system”.
It warns that the potential benefit to the North must be balanced against the impact of the proposal on the UK as a whole.
CBI is not the only organisation that has concerns about devolving tax powers.
Even finance minister Sammy Wilson has warned that the price the North will have to pay to set corporation tax levels must be right.
Trade unions also claim that cutting corporation tax rates will simply make Northern Ireland “an onshore tax haven”.
According to Peter Bunting from Ictu, it would “not guarantee a single new job . . . it will guarantee big increases in profits for large businesses”.
But one former Northern Ireland secretary believes the North should embrace the corporation tax gamble.
“If there’s any area in Europe that has shown itself capable of radical change,” John Reid says, “it is Northern Ireland, and that’s why I am a supporter of devolving control over taxation to the Assembly.”
If the UK treasury should decide to roll the dice on devolving corporation tax to the North, then it could be a whole new all-island game on.