Northern Ireland stands to lose hundreds of millions of pounds of core funding from the Government if it uses powers to cut corporation tax outlined in George Osborne’s Autumn Statement.
Under EU rules, the province would have to compensate the UK exchequer for any lost revenues were it to cut its corporation tax rate. That would likely be achieved by a cut to its block grant.
Richard Murphy, from Tax Research UK, said the province risked a “double whammy” of falling revenues from lower corporation tax, plus the money it would have to pay back to the UK.
In a paper written with Andrew Baker, honorary research fellow and reader in political economy at Queen’s University, Belfast, he says that if the tax were cut by just £300m, then compensating for that loss would require an additional £2.4bn in private-sector profits.
In pictures: Chancellor George Osborne delivers his Autumn Statement
Mr Murphy said: “The problem for Northern Ireland is that the moment they cut their corporation tax rate they lose a block grant rate of exactly the amount of the tax cut they’re offering. That’s a double whammy. They lose the tax, they lose from the cut in the block grant and there is no guarantee that they’ll get a single extra job as a result. NI simply can’t afford this.”
The requirement dates back to a 2006 European Court of Justice ruling over Portugal’s lowering of corporation tax paid in the Azores in an attempt to lure businesses to the archipelago.
It found that states could allow regions to have differential tax rates if there was sufficient devolution and if there was compensation paid to the state from a cut. Otherwise such a tax reduction could be classified as illegal state aid to industry. Allowing Northern Ireland to lower its rates is aimed at giving the province a better chance of competing with Dublin, with corporation tax in the Irish Republic standing at 12.5 per cent.
But several studies have called into question whether this would be the case.
Accountancy firm PricewaterhouseCoopers, said in a report that the measure would be “no magic bullet” for the province.
Its report Corporation Tax – Game Changer, or Game Over? – concluded that there was “no evidence that the Republic of Ireland’s low Corporation Tax, by itself, attracted the high levels of foreign direct investment (FDI) that fuelled the Celtic Tiger economy.”Reuse content