Hervey Gibson: Treasury's war is being fought with dud ammunition

WHEN voices in Scotland started making their case post-election for devolving corporation tax, many observers were waiting for a rearguard action from the coalition.

This came last week when David Gauke, the exchequer secretary to the Treasury, announced HMRC "provisional" estimates in the House of Commons. Scottish Secretary Michael Moore picked them up at a Scottish Financial Enterprise event, providing evidence of a co-ordinated campaign.

But they are using faulty ammunition: Moore said giving Scotland the power that businesses and the new Scottish Government are calling for would cost Scotland "more than 2.6 billion" - but the GERS finance survey published the same day showed total Scottish revenue from onshore corporation tax is less than 2.6bn.

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The reality of how useful corporation tax would be as an economic lever in making Scotland more competitive explains why the Treasury is so keen to stop it from happening. Far from accepting the Treasury's clearly flawed analysis, we should turn our attention to how this lever could work for Scotland's benefit.

Before the election, corporation tax was omitted from the Scotland Bill. It rated as one of the non-trivial minutiae of the election campaign. Apart from histrionics among the small far left parties, which wanted to raise tax to penalise large corporations, only the SNP addressed the issue in its manifesto. After the election, Alex Salmond lost no time in telling David Cameron he wants freedom to reduce the tax to attract new investment.

Corporation tax as a live political issue arose when, as part of the single market process, the Irish were told they could not tax export activities at a lower rate than domestic ones. At the time, the revenue from domestically-generated tax was low, because profits on domestic activities were low. If Ireland was to be obliged under EU law to equalise, it was an easy decision, instead of increasing the tax on export activities, to drop it on domestic ones.

International companies with flexible investment needs almost always say tax plays no more than a minor role in making a country attractive. But there are few who would deny Ireland's successful development of chemicals and IT industries owe something to the low tax rate. The head of IBEC, Ireland's equivalent of the CBI, said: "We set up our tax structures in a way that facilitates people to do the best for themselves. That's true sovereignty."

Two parts of the UK have historically competed most directly with Ireland for investment - Northern Ireland and Scotland - and both are seeking this aspect of sovereignty for themselves. In Northern Ireland, there is unanimity amongst all the parties, and the business lobby as well, for the devolved administration to be given discretion over company taxes.In Scotland, the CBI - still sometimes seen as nestling in the embrace of London's centre point - argues against "complication" of the tax system, but other lobby groups support flexibility. The opposition parties were quiet, but the SNP pressed for tax discretion.

Would it be legal? Obviously yes, if Scotland were independent, but as part of the UK? EU law was established by the "Azores judgment" where Portugal appealed a European Commission decision to the European Court of Justice. The outcome of that was that, while setting up a financial tax haven is not on, regional jurisdictions can vary tax rates provided the national government does not compensate them for any loss from lower rates. In other words, provided it is their own decision and they take the consequences, positive or negative. That is the position that the SNP is seeking for Scotland, but the HMRC report is trying to exaggerate the consequences beyond all credible limits.

In many voters' minds, breaking out from the economic policy of the UK government would be one of the early attractions of independence. But for Scotland to properly assume fiscal responsibility, corporation tax will need to be part of the breakout.

• Hervey Gibson is chairman of Cogent Strategies International and former head of economics at Scottish Enterprise.