NI cut in Corporation Tax could help Republic too

Editorial in March issue of Finance Dublin:

The Republic's steadfast defence of its corporation tax regime, most recently exemplified by the new Taoiseach's forthright defiance of the French President's attempt to apply pressure to Ireland in the context of the eurozone banking bailout discussions, is further evidence of the Republic's practical understanding of the benefit, and importance of the incentive to the success of its economy. As we show elsewhere in this issue (pages 8-10), the UK's common cause with the Republic on this matter will be of tremendous benefit in the years ahead as the battle to preserve the Irish fiscal package position in Europe continues.

There was once a time, at the turn of the last century, when the economies of the North and South of Ireland were as chalk and cheese, one an advanced manufacturing economy, the other largely agricultural. The intervening century has seen a convergence of circumstances, and now both have a similar interest in making themselves an attractive base for global export businesses.

It is no wonder that far sighted thinking amongst NI economists has seen that, and, the UK Coalition Government in its wisdom has seen this too. Yet, understandably there are doubts, echoing the original doubts expressed by the former Administration, as some economists have waded into the debate on both sides.

Dr Esmond Birnie, chief economist of PriceWaterhouseCoopers in Northern Ireland has offered a sceptical assessment of the possibility, echoing the original sceptical assessment of the proposal by Sir David Varney in his 2007 report (commissioned under the Brown Government) which claimed that a cut in the NI rate from its then level to the Republic's level would cost £278 million annually – exactly half, as it happens, of the total estimated annual corporation tax take from Northern Ireland based taxpayers. (The NI corporation tax take accounts for 1-1.5% of the UK's total – hence the experiment of cutting the NI rate would provide the UK as a whole with an interesting experimental case study, that might eventually be replicated in the rest of the country).

Birnie also has argued 'that the Republic has had, in effect, relatively low tax on company profits (especially in the manufacturing and some other trading sectors) from as early as 1958. The fact that the Celtic Tiger did not really begin to roar until the late 1980s, three decades later, suggests either that the tax effect was a very slow burn or that Corporation Tax was mixed in with a range of other factors which (gradually) created the preconditions for sustained and rapid growth'.

He reiterated this point at a Belfast seminar recently organised by The CityUK (see also page 9 of this issue), to disagreement from the Secretary of State, who earlier in his presentation reported on a promotional visit he had made earlier in the day in Co Down, which had, up to recently, he reported, not seen a single FDI investment in five years. (The First Derivatives new financial services project in Newry bucks Co Down's five year duck).

Dr Birnie's analysis, while correct to emphasise the complexity of the Republic's FDI package, involving, as he has pointed out, the Republic's wide double tax agreement network and other factors, underplays the immediate and sustained impact on FDI and Irish industrial productivity in the late 1950s, of low Irish corporation tax - what was then called 'export sales relief' for manufacturing. This resulted, within years of its introduction, in the 4 p.c. per annum GNP growth rates in the Republic in the early 1960s, of the Republic's First Programme for Economic Expansion, authored, as it happens, by two Co Down-born economists, Dr Kenneth Whitaker, and Prof Louden Ryan, and which was accompanied, for example, by an iconic Time Magazine cover of the 1960s, featuring the lifting of the Republic's protectionist 'Celtic veil'.

Ranged against this view has been the formidable weight of the Secretary of State and other influential economists, including Sir George Quigley, former secretary of the NI Department of Commerce, author of one of the two seminal Government reports on the NI economy (the original being the Isles & Cuthbert Study of 1957), chairman of Ulster Bank, and now chairman of the world's third largest aircraft manufacturer, Belfast-based Bombardier. Sir George attended the seminar, and while he did not speak, was credited as a driver behind the idea by the Secretary of State (he is a member of an influential group of academics, businessmen, and tax specialists, the Northern Ireland Economic Reform Group which has produced a number of reports detailing the economic case for a low rate of corporation tax in Northern Ireland). (See: ).

Most impressive however in favour of the move is the weight of opinion backing it from the NI Business Alliance, which includes the CBI Northern Ireland, the IOD, the NI Chamber of Commerce, the Centre for Competitiveness, the NI Independent Retail Trade Association, and the NI Food & Drink Association.

It has also received support from the First Minister, Peter Robinson, and the Deputy First Minister Martin McGuinness.

Against this has been ranged the ubiquitous anti tax competition campaigner Richard Murphy, of the Tax Research Institute, who produced a report in December 2010, commissioned by the TUC and the ICTU, and which argued: “The simple fact is that the Republic does not just compete on tax rate – it does in effect offer many companies a zero tax base so they pay nothing at all in the Republic. Which is a major reason for their current economic malaise. And unless Northern Ireland want to go the same way they’d be most unwise to follow. Those promoting the alternative idea – that the rate be cut – include the Taxpayer’s Alliance, KPMG and local big business - are of course either indifferent to government itself or are acting out of self interest for a particular section of society - the owners of capital”.

Murphy's paper consisted of a mix of factual inaccuracies, and assertions that had the logical result of undermining, rather than supporting the argument, while finally admitting that his paper did not actually dispute the efficacy of the Republic's low rate of corporation tax in any case, just that it would not be a good thing for Northern Ireland.

The factual errors in the Tax Research Institute's document included the following assertions: 1) that eurozone membership was a key factor behind the Republic's FDI surge (while being outside the eurozone did nothing to affect London's leading role as No 1 financial centre in the world); 2) 'the role of the IFSC' (muddled, and very dated, data adduced to claim that most of the corporation tax take in the Republic comes from the IFSC), and 3) the assertion that the Celtic Tiger only began in the late 1980s, when it was spurred (another canard) by the impact of EU transfer payments to the Republic (the Republic over the period 1980-2010 was actually a net neutral contributor to EU Regional/Social funds). Three of the other points marshaled in the report referred to enhancements to the basic low headline rate of the Republic (e.g. 'thin capitalisation'), which have effect of enhancing the effectiveness of low corporation tax on the attractiveness of the jurisdiction, while ignoring other aspects that have the effect of raising the Republic's effective corporation tax rate vis a vis other countries (e.g. deemed attribution techniques, which, recently have fallen foul of the EU in the British Crown Dependancies, and which the three Dependencies are all acting on).