Playing corporation tax 'catch-up'
One of the imperatives for Gordon Brown's Treasury team, as it prepares for the impending pre-Budget statement, is the need for the UK government to play corporation tax 'catch-up' with the rest of the world.
If it ignores the current global trend and leaves its corporation tax rate for larger companies at 30%, there is a real danger that the UK will become globally uncompetitive as businesses begin to vote with their feet.
The recent move by the Isle of Man to reduce its corporation tax rate, from 18% to 0%, is the latest indication of a trend in corporation tax reduction being set across the industrial world.
Germany, with a rate of 25%, Hong Kong with 16%, Singapore at 24.5%, Ireland with 12.5%, and Norway and Sweden, both with a tax rate of 28%, have all adopted corporation tax rates lower than that in the UK.
You can be certain each of them looked at the global ‘market rates’ before making its decision. Ireland’s move, in particular, caused ripples in Singapore where the similarities between the two economies have been noted.
Countries which offer low corporation tax, coupled with tax systems which impose low compliance burdens on businesses, will always be attractive to inward investors. Communications developments, ease of travel and improvements in education worldwide mean that companies will not have to limit themselves to a list of ‘developed world’ locations when it comes to looking for new offices or factory sites.
It will not be enough for the UK to trade on its traditional benefits to attract new business and finance. It needs to face the fact that, with its higher rates of tax and heavy regulatory burden, it will be a less attractive place in which to invest.
Leaving the rate at 30% could stifle further investment into the UK, and prompt potential investors to do business elsewhere. With the current economic climate in the UK, doing nothing is not an option in this case.
- Chas Roy-Chowdhury is head of taxation at ACCA.
