Ireland has often been branded a tax haven because of its comparatively low rate of corporation tax, which at 12.5% is one of the lowest rates in Europe and significantly below the average EU corporation tax rate of 20.12% (not to mention the US rate of almost 40%).
With the UK’s move towards tax devolution allowing Northern Ireland to mirror the corporation tax rate in the Republic of Ireland by establishing its own 12.5% rate, is the UK also at risk of being branded a tax haven?
First things first: what is a tax haven?
According to the Harmful Tax Competition report from the OECD, tax havens have at least two of the following four attributes in common:
So is Ireland a tax haven?
Ireland rejects the label of ‘tax haven’, and many tax experts agree that the moniker doesn’t fit in Ireland’s case, although there can be little doubt that the country’s favourable tax regime has attracted multinational corporations ranging from Facebook to Apple to set up their European operations in the Emerald Isle.
While Ireland’s corporation tax rate is comparatively low, and therefore attractive, 12.5% could hardly be considered ‘nominal’. In addition, this rate is available to companies throughout the country, both large companies and SMEs, and most of the multinationals that set up shop in Ireland have substantial operations and employ hundreds or thousands of people. Finally, Ireland doesn’t adhere to the form of bank secrecy seen in a number of other EU countries, most notably Switzerland, Lichtenstein and Luxembourg.
So, despite its low rate of corporation tax the IMF believes Ireland is not a tax haven, and following Ireland’s move to eliminate the ‘ Double Irish’ the country’s 12.5% rate could be viewed as a normal competitive strategy. After all, EU member states still set their own tax policies and have a right to use their tax regimes as a competitive tool to attract large multinationals to set up shop there.
What about Northern Ireland?
In 2015 the British government published the Corporation Tax (Northern Ireland) Bill, which became law on 26th March 2015 and provides for the devolution of tax powers to the Northern Ireland Assembly, empowering the Assembly to set its own ‘Northern Ireland Rate’ for corporation tax.
After an initial delay, the approval of the Fresh Start Agreement means Northern Ireland is due to gain devolved tax powers in April 2018, when the Assembly is expected to immediately introduce a corporation tax rate of 12.5%, in line with the rate in the Republic of Ireland.
While this risks attracting accusations of ‘tax haven’ for at least part of the UK, if the OECD and the IMF don’t classify the Republic of Ireland as a tax haven then it follows that Northern Ireland shouldn't be classed as a tax haven when the Northern Ireland Rate is introduced, even though that rate will make the region more tax efficient for companies than many other parts of Europe (and other parts of the UK, for that matter).
What’s Scotland's position on corporation tax?
For much of the 2000s the SNP’s campaigning included a promise to cut Scotland’s corporation tax rate to 12.5% in order to compete with Ireland. However, more recently the SNP’s leader, Nicola Sturgeon, has suggested her party now favours a rate that is around 3% below the standard UK rate.
Lower corporation tax for England and Wales too
George Osborne’s recent Budget revealed that the standard corporation tax rate in the UK will be cut to just 17% by 2020, for both large corporations and small businesses. This is a substantial drop from the UK’s rate just three years ago, when corporation tax was 20% for SMEs and 23% for larger companies.
While political leaders in Northern Ireland are concerned that this new 17% rate will erode the competitive advantage offered by the province’s upcoming 12.5% rate, it does affirm the view that the UK as a whole is moving towards lower, more globally competitive rates of corporation tax.
However, that doesn’t mean the UK aspires to be a tax haven. It could be argued that the government’s devolution of corporation tax powers to Northern Ireland, and its decision to cut the standard corporation tax rate to 17% by 2020, are not intended to turn the UK (or even parts of the UK) into a haven for tax avoidance, but are instead designed to create a more business-friendly tax regime.
While not everyone agrees with the British government’s decision, a working paper from the OECD argues that high corporation tax is the most harmful form of taxation to a country’s economic growth, suggesting Osborne’s move towards lower corporation tax may be less about tax avoidance and more about growth.