Corporation Tax: new jobs or just hot money?

Corporation Tax Consultation launch in March

Corporation Tax Consultation launch in March

With mainstream political consensus behind the business sector’s ‘silver bullet’ of reduced corporation taxes, should we ask ourselves: “What’s the down side?” Perhaps consider three main points: first, the scale of the Executive’s gamble; second, will the measure create jobs? And third, is the experience of the Republic of Ireland misunderstood?

THE EXECUTIVE’S GAMBLE

Providing this corporate giveaway will cost the Executive. The EU judgement in the Portuguese Azores case requires that no subsidisation can cushion losses in tax revenue. The UK Treasury estimates losses could cost £285m, similar to the 2007 Varney Report estimate of £300m. If the tax take reduces, who plugs the gap? The gamble is that job losses in hospitals, schools and social services will pay for a no-strings tax break for well-off corporates.

A further gamble is the requirement for intra-UK Transfer Pricing: that every tin of baked beans delivered from Essex warehouses will need to be priced separately. A transfer pricing arrangement occurs when two or more businesses owned or controlled by the same person trade with each other. The term “transfer pricing” is used because if the entities are owned in common, they might not fix prices at a market rate but might instead fix them at a rate which achieves another purpose, such as tax saving. Establishing a procedure to set an arm’s length price for any and all transactions is no simple matter, adding bureaucracy to businesses and costs to Northern Ireland consumers. The inflationary effect of Transfer Pricing has not been calculated.

WILL IT CREATE JOBS?

No job creation criteria have been articulated for the policy. Kate Barker, chairperson of the NI Economic Advisory Group, a key cheerleader for the corporate giveaway, states bluntly that “there would be no mechanism put in place to stop companies retaining the savings or paying them back to shareholders as dividends, rather than reinvesting in the economy.”

Similarly, local CBI chief, Terence Brannigan, told the Northern Ireland Select Committee in November 2010: “There is no guarantee on jobs and it would be totally misleading of me to sit here and say that I could guarantee you. I couldn’t guarantee you anything.”

In short, the corporate sector can “pocket” the tax giveaway.

In truth, our ‘Enterprise Zone’ may artificially induce transactions to Belfast but is less likely to assist indigenous job creation. Evidence shows that low Irish corporation tax enticed “brass plate” companies, but simply to do behind Dublin Georgian doors what they couldn’t do at home. “Lichenstein on the Liffey”, Vince Cable called it.

Financial or “portfolio” investment in the Republic vastly outweighed productive inward investment. Trinity’s Jim Stewart has shown that the median number of employees engaged in an IFSC (Irish Financial Services Centre) subsidiary of a foreign multi-national corporation, from 1999-2003, was an astonishing zero!

Fly-by-night companies, with no intention of creating real jobs, may set up glass suites in Titanic Quarter. They will solely park profits before moving them swiftly to other tax havens. Head Offices may transfer here, employing only jobbing solicitors and accountants. Artificial transactions, like ‘repackaging of goods’ (with minimal labour content) will shift profit to and from Northern Ireland.

What it will attract are risky, tax averse, companies. Corporation tax giveaways tend to attract hot money, not jobs!

THE REPUBLIC’S EXPERIENCE

The Republic of Ireland has had low corporation tax in various guises since1957. The current rate of 12.5% dates from 2003, well after the “Celtic Tiger” took off. To put the real, productive growth within the Republic’s economy down to low corporation tax rates misses the point. The attractiveness of an English speaking location within the Eurozone was a factor; vast EU investment in Irish infrastructure another; strong supply side skills policies in education and training were important, as was income and price stability, and a focus on high employment levels achieved through successive National social partnership deals from the late 1980’s onwards. These factors all contributed to the success of the Republic in attracting foreign direct investment (FDI).

Were foreign companies only to consider tax incentives, the Republic can offer a more rounded “tax efficiency” package than just the headline rate. Ireland does not have CFC (Controlled foreign companies) legislation, so Irish holding companies avoid tax on imputed income of a foreign subsidiary, even if that subsidiary is located in a tax haven. Northern Ireland cannot replicate this offer.

Likewise, Ireland’s lenient treatment of dividend income received from foreign subsidiaries cannot be replicated in the North. Irish rules on “thin capitalisation” are another advantage. The most important feature of tax secrecy jurisdictions is always the same – that politics is captured by financial services. The ability to shield its affairs from scrutiny has been a key factor in the decisions of “tax efficient” corporations locating in the Republic.

As such, equalising the headline corporation tax won’t do it. If, as is the case for Google in Ireland, the Republic actually offers the chance to pay almost no tax at all, then no tax rate that Northern Ireland can offer can out-do the current offering in the Republic.

Our politicians should concentrate on closing loopholes – not opening new avenues for evasion.

Mark Langhammer is Director of the ATL (Association of Teachers and Lecturers) and is an elected member of the Northern Ireland Committee of the Irish Congress of Trade Unions.