Scottish independence:Corporation tax plan warning

PLANS to reduce the rate of corporation tax in an independent Scotland could produce a “race to the bottom”, the Chartered Institute of Taxation (CIOT) has warned.

The CIOT has warned that the plans could engineer a 'race to the bottom'. Picture: Hemedia

The Scottish Government’s independence White Paper contains plans gradually to reduce the tax by up to three percentage points below the prevailing UK rate.

The policy is aimed at securing a competitive advantage and helping to “reverse the loss of corporate headquarters”.

The CIOT, which represents taxation professionals, also said the tax cut for businesses “does not appear to tie in” with other aims set out by the Government such as social cohesion and sustaining public services.

The CIOT is among a number of organisations due to give evidence to Holyrood’s Economy Committee as part of its inquiry into Scotland’s economic future post-2014.

It outlined its concerns in a written submission to the committee.

It said: “We are concerned about the stated policy of reducing the rate of corporation tax by up to three percentage points. This could produce a ‘race to the bottom’ with the UK matching Scottish rates.

“Corporation tax is a relatively small tax source. The cost of labour to businesses is far greater, and if other policies, such as the minimum wage proposals, result in an increase in labour costs, this could outweigh the corporation tax gain to an investor.

“Another concern is that it does not appear to tie in with other visions set out by the Scottish Government, such as building social cohesion, sustaining public services and joining up tax and welfare benefits policy.”

The Law Society of Scotland is also due to give evidence to the committee.

Its written submission also addressed issues surrounding corporation tax.

It said: “If Scottish rates of tax were markedly lower than the rest of the UK, it raises the question of whether Scotland would be able to raise sufficient revenue to maintain adequate public services, including health, welfare and education services.

“Whereas if they were much higher, Scotland may no longer seem like a desirable place in which to live compared with other parts of the UK and businesses may be discouraged from investing in Scotland if the rates were viewed as anti-competitive.”

Further comment came from the Institute of Chartered Accountants of Scotland.

It said economic studies have suggested that “economic competitiveness or inward investment attractiveness” is about “much more than the tax rate”, and questioned whether a corporation tax cut was necessary.

“Inward investment decisions have a number of complex factors; for example the most attractive country in Europe for manufacturing inward investment was recently found to be Germany, whose corporate tax rate is over 30 per cent,” it said.

“It seems that Scotland is successful at attracting inward investment already, so is a potentially expensive tax rate cut really necessary?”