Corporation Tax

Is this the most harmful tax for economic growth? Asks Kate Wilkinson

In July 2008, the OEDC reported that it considered corporation tax to be the most harmful tax for economic growth. The UK Government has stated that its aim is to create “the most competitive business tax regime of any major western economy”. 

So how does the UK stack up compared to other developed markets?

A comparison of corporate tax rates, drawn from a recent OEDC report and published by the Guardian revealed a wide spread of combined corporate income tax rates:

  • 12.5% in Ireland
  • 39.54% in Japan
  • 39.21% in the US
  • 33.99% in Belgium
  • 25.24% the average rate amongst the main 19 European countries  

The UK, previously at 28% and now at 26% does not therefore look completely out of kilter. The promise of further 1% reductions in each of the next 3 successive years will bring the UK down below most of its peers.

A weapon in the global battle

Over the last 20 years, corporation tax has increasingly been used as a weapon in the global battle to attract investment from multinationals considered capable of hopping between jurisdictions as the fancy takes them. As a result, corporation taxes have fallen steeply since the highs of the 1980s to new record lows. The further reduction in the UK rates may encourage some migrants to return.

London is still home to many multinationals; Britain’s companies paid £38.5bn in corporation tax last year – 7% of the Governments total tax take. Think back to 1979, the year Mrs Thatcher came to power, and the corporation tax contribution was only £4.6bn, 5.4% of total tax revenues. The contribution of the financial sector to corporation tax was more than £10bn pa before the financial crisis; however this had halved by 2009.

Could it also be that the dip in corporation tax rates compared with the increase in personal income tax rates has encouraged more entrepreneurs to structure their businesses through companies, thus increasing corporation tax receipts at the expense of income tax? 

If corporation tax was the be-all and end-all for companies to determine their place of residence, we would see both Ireland and Iceland brimming with the large multinationals.  Both they and the respective governments would be rubbing their hands with glee. But we all know of the financial problems of both Ireland and Iceland.

Conversely, HSBC has recently confirmed that it was giving consideration to alternatives to London for its HQ and was reviewing the potential benefits of being based in Paris – where the corporate income tax rate is currently 34.43%. 

So, corporation tax rates alone are clearly not the driving force. Maybe the bank payroll tax and world-wide debt cap, onerous legislation and compliance burdens as well as complex tax rules, including the rules governing controlled foreign companies (CFCs), also have a role to play in making companies think twice about setting up or staying in the UK. Indeed the controlled foreign company rules are considered by many to be one of the factors contributing to the exodus of companies form the UK.

Towards the end of 2010 the UK Government published its road map for corporation tax, setting a broad direction for the future rates of corporate tax. It has also announced proposed changes to the CFC rules to assist the UK’s competitiveness and proposals to introduce a special corporation tax rate of 10% on newly commercialised patents in a bid to attract more intellectual property to the UK. We also heard of moves to simplify the tax laws in the Finance Bill 2011. 

Whilst getting corporation tax rates down to 26% is clearly good news for existing businesses, lower corporation tax rates alone cannot guarantee growth in the UK.

Kate Wilkinson is Jordans Limited Head of Internal Legal Services (interim)

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