Written by Eamonn Donaghy
1. Current Position
The legislation to permit the NI Assembly to set a corporation tax rate in Northern Ireland is on the statute books and is oven ready to become active legislation.
At the time that the legislation was brought into law, there were detailed negotiations between the Treasury and the Department of Finance to put in place the necessary mechanics for a reduced rate of corporation tax in Northern Ireland.
HMRC have also issued detailed guidance notes on how the legislation will operate.
The legislation will become operative once a Treasury Regulation made by Statutory Instrument is put in place – this does not require approval by Parliament but will require the Assembly to be operative.
Once the legislation is operative, the Minister for Finance can bring a recommendation to the Assembly for a lower rate of corporation tax and this will become effective if the Assembly passes a Resolution to set such a rate.
2. What are the main benefits of reducing the corporation tax rate in Northern Ireland?
The sole purpose of a lower rate of corporation tax in Northern Ireland is to create jobs which are long term, value adding and well paid. Indeed there have been several detailed economic studies showing that reducing Corporation Tax in Northern Ireland will create tens of thousands of jobs over a twenty year time frame.
A reduced rate of corporation tax will attract additional investment into Northern Ireland by new foreign owned companies and by encouraging existing foreign and local companies to expand and make additional investment.
3. Does low Corporation Tax still matter?
Yes it does. This is clear from the significant reduction in US corporation tax rate over the last number of years. The ongoing importance of the existing 12.5% corporation tax rate in Ireland dominates the business pages in the Republic and has led to a very significant budget surplus in Ireland over the last few years. Indeed, a recent report stated that between 2014 and 2022 corporation tax receipts in the Republic of Ireland rose by 23% per annum over that period. All of this clearly demonstrates that Corporation Tax still matters a great deal to multi-national corporations.
There have been significant changes to international tax law over the last few years. Whilst these changes have been aimed at tackling unacceptable international tax practices and setting a floor on corporation tax rates that the largest multinational companies mut pay at a rate of 15%, it is clear that the changes will benefit countries who offer low tax rates to companies that have a real presence and perform real commercial activities in that jurisdiction. This is exactly what the NI Corporation Tax act is aimed at achieving.
A competitive corporation tax rate in Northern Ireland, which could mirror that of Ireland will make us a very attractive location not only in the UK but also in Europe and globally.
4. Investment Outlay requirements
If the NI Assembly were to reduce the rate of corporation tax in NI below the current UK main rate of 25% then there would be an initial reduction in the amount of corporation tax collected from NI based corporations. The reduction in tax yield would be in direct correlation to the reduction in rate. However based on the impact of lower corporation tax in Ireland over the last three decades, the yield from corporation tax in NI will rise due to the increase in economic activity which will come from the increased foreign direct investment [FDI] that will be attracted to NI. A model of the impact of a lower corporation tax rate of 12.5% in NI is attached to the end of this paper. If the increase in economic activity in NI due to a lower corporation tax was to be set at 15% (significantly lower that the impact in Ireland over the last decade) and this was compared to a bench mark UK growth rate of 2% per annum, then the annual reduction in corporation tax yield in NI from introducing a 12.5% rate will reverse after year 6 and the cummulative breakeven corporation tax yield will occur in year 11. The peak negative cashflow from reduced corporation tax yield will be £2.4bn in year 6.
If looked at as a business plan then the impact of the reduction in corporation tax in NI would be similar to requiring an ‘overdraft’ facility from Treasury for a 11 year period, with an overdrawn facility ceiling of £2.5bn.
5. When should this happen?
Now that there is a functioning Executive and Assembly is it possible for the requisite legislation to come into effect in the foreseeable future.
In reality the timescale for the implementation of a lower rate of corporation tax in Northern Ireland may be up to two years – which will give time to publicise the lower rate and enable FDI decisions to be taken without an immediate loss of corporation tax yield.
6. What needs to happen now?
It is vital that the executive and the Assembly grasp this opportunity as soon as possible. Whilst a reduced corporation tax rate will not by itself solve the challenges facing our economy, it will give a clear message that our politicians are serious about our economic future and the delivery of jobs and prosperity for all of the people of Northern Ireland.
