Stability and certainty in business taxes are just as important as low rates

TAXES are big news these days. This week's tax news has been led by Chancellor Alistair Darling's move to defuse the political row caused by the abolition of the 10p income tax rate. But not far behind is a fuss about corporation tax rates, liable to bubble up every time news breaks that a British company is thinking about relocating to Ireland.

This is often presented as a simple consequence of the fact that the corporation tax rate in Ireland is a lowly 12.5 per cent compared to Britain's 28 per cent. But that cannot be the whole story. If it was, the exodus across the Irish Sea would have begun many years ago when low Irish rates first appeared. It is only in the last few months, with moves out of Britain announced by Shire, a pharmaceuticals company and United Business Media, an international events an media company, and a swathe of other big companies refusing to rule out similar moves, that the issue has loomed large.

The tipping point, as George Kerevan wrote in this space a couple of weeks ago, has been the Treasury's proposals to tax revenues earned from brands, patents, designs and other intellectual property held overseas by tightening a set of regulations called the controlled foreign company (CFC) rules. Since this income attracts special rates of tax relief in Ireland and escapes largely untaxed, the lesson for a British company which derives a large proportion of its revenues from overseas is rather obvious.

Clearly it is a real threat, otherwise Darling would not have announced the formation of an industry/tax lawyer/civil servant group to, as he said, "discuss ways in which the tax system can provide the long-term certainty multinational companies need, considering the competitiveness and other challenges facing both businesses and government".

Darling's statement is interesting because the use of the words "long-term certainty" implies an admission that the British corporate tax regime has become uncertain. Indeed the stability of the tax system has been one of the reasons that Britain has not been faced with an outflow of companies and has been the top destination in Europe for inward investment.

But because of the government's increasingly desperate search for ways of raising taxes without causing a negative reaction among voters, the business tax regime lately has looked distinctly volatile. Recent changes to the capital gains tax regime have reversed reforms introduced by Gordon Brown ten years ago and the "nondom" tax raid on foreigners living here has convinced many in the business world that Britain's tax regime now looks alarmingly unstable.

That, plus the complexity of the proposed new CFC regime which threatens an enormous burden of checks on company tax affairs, appears to have been the tipping point for many British companies.

But before we conclude that the government will be forced to backtrack, there are a couple of points to be considered. Firstly, Ireland's low-tax regime is used by many multi-national companies as a means of avoiding paying taxes in other jurisdictions. The Microsoft case has become a notorious example. Irish tax law exempts income earned from patent royalties. Microsoft, the Wall Street Journal reported two years ago, had set up an Irish subsidiary to take advantage of this. It apparently had very few employees and yet controlled $16 billion of Microsoft assets making, in 2004, profits of $9bn. This subsidiary, had it operated in America, would have paid $800 million in taxes, but its Irish location ensured it only paid $300m. Very nice for the Irish government and its citizens, not so good for Americans. For that reason, a lot of governments, and the EU, are agitating for the removal of these kind of tax-haven privileges.

Secondly, an ethical and moral question is increasingly being raised about this kind of tax advantage. This week Christian Aid accused the Irish government of colluding in siphoning out taxable wealth from poor countries. The charity calculated that companies' transfer of profits to tax havens including Ireland cost the world's poorest countries about $160bn in lost tax revenues, or about one and half times the amount these countries get in aid from rich countries. It also reckoned that this costs the lives of about 1,000 children a day.

These two considerations do raise the question of how long some of the special advantages offered by the Irish tax system will endure.

This, however, should not offer the British government an excuse for inaction over corporation taxes. It is now an established fact that the competitive regime of which ministers proudly boasted has disappeared. The chart below, comparing trends in the headline corporation tax rate in Britain against the world and the EU, shows that quite clearly.

This, coupled with the loss of Britain's reputation for stability and certainty in the tax system, means that the government does have an urgent case to answer.

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