The House of Lords has recently criticised the speed of further devolution of powers to Scotland, but nevertheless the Scotland Bill is progressing through the UK parliament. Devolution more widely across the UK is a direction of travel in this Chancellor’s Autumn Statement.
Among the announcements, George Osborne said that Stormont plans to set the Northern Ireland corporation tax at 12.5 per cent and income tax powers are to be devolved to Wales without the need for a referendum.
Devolution to assemblies and parliaments will lead to different taxes and tax rates and with this comes more tax competition. Add into the mix, there are some devolution proposals to the English regions. Is this a good or a bad thing?
So what are the positive aspects to tax competition?
There are a number of answers to this. Firstly, tax devolution should bring accountability for tax raising closer to those making the spending decisions. This appears to have been the main driver to date.
Secondly, with the devolution of corporation tax to Northern Ireland, there are arguments put forward about the need to encourage inward investment and to have a rate that is not significantly higher than that in the Republic of Ireland.
Thirdly, the regional parliaments may use their new tax-raising powers to suit their local needs, such as to boost tourism or manufacturing.
Other factors may also influence decisions, such as perceptions of fairness, the need to raise funds, and encouraging or discouraging certain behaviours.
There can also be downsides to tax competition and there are questions about whether or not they have been fully considered to date. These questions perhaps deserve more of an airing.
Reduction in tax receipts
Tax competition is usually effected by reducing rates or offering attractive reliefs from tax, but this can encourage a damaging “race to the bottom” between different jurisdictions, which would reduce tax receipts for both the devolved and UK administrations. This has been an argument put forward by many commentators in relation to the possibility of devolving corporation tax to Scotland.
If a tax is devolved to a region but its tax base is not clear-cut then this can create significant new complexities and administrative burdens. For example, many companies operate across the UK and it may not always be easy to isolate profits from different jurisdictions, and this may be coloured by the desire for profit to arise in the lower tax jurisdiction. Consequently, the devolution of a relatively mobile tax such as corporation tax could lead to disputes between taxpayers and the tax authorities about the correct taxing jurisdiction, transfer pricing, double tax relief etc. Even if it is only the setting of the tax rates that is devolved, this may lead to the same issues that currently exist with international tax and its payment to the appropriate authorities.
Risk of tax avoidance and tax planning
Tax competition can also lead to tax avoidance and tax planning. For example, tax can be more competitive in one jurisdiction compared with another in order to attract inward investment or the use of, say, a particular airport. The attraction to the potential taxpayer is a reduction in their tax bill, but it also encourages that taxpayer to avoid a less competitive tax. Equally, tax competition can be between different taxes. For instance, if corporation taxes are lowered there is an incentive for any unincorporated business to seek to convert sources liable to income tax into profits that are liable to corporation tax. In the eyes of some, this is also tax avoidance.
There will always be a balance to be struck between – on the one hand, the desire for taxes that are specifically designed for local circumstances and local accountability. On the other hand, there is a desire by some for taxes that provide ease of administration for taxpayers, for businesses that collect taxes on behalf of the state, and for the tax authorities.
Ease of administration tends to come from uniformity and certainty. It’s difficult to discern a clear direction of travel and Icas continues to call for a tax road map which outlines the overall tax strategy over the course of this UK parliament.
• Charlotte Barbour is director of taxation at Icas, the global body for chartered accountants