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Gordon Brown walked into a recent meeting of EU finance ministers insisting “we believe that tax competition is the best way forward”.
Using taxation to make Britain a more attractive place to invest has been the policy of all British chancellors for the past 20 years. Having been among the leaders, however, the UK is being overtaken. It has fallen out of the top ten in international competitiveness studies and is in danger of rejoining the pack.
The days are long gone when leading British companies queued to leave the country to avoid punitively high tax rates and a regime notoriously unfriendly to companies relying on foreign earnings.
The reform of corporation tax set in train in 1984 allowed the main rate to be cut from 54 per cent to 35 per cent and today's 30 per cent. Rules that sent multinationals to Amsterdam and other centres were softened and the Treasury listened to calls to align taxation of key sectors better with the way their businesses operated.
Top rates of UK income tax were heavily cut, foreign expatriates — needed to make the City a top world financial centre — were treated sympathetically, and favourable arrangements were often allowed to rich foreign individuals who chose to locate here.
This change of heart, along with wider economic reforms and the English language, helped to make the UK Europe’s leading destination for foreign direct investment. Eurozone countries preferred to invest in Britain. It was even claimed that the UK had become a tax haven.
That position has progressively come under attack from two directions. Pressures to raise tax rates or tighten tax rules have grown, both at home and abroad. So has competition from other countries keen to emulate the UK approach, starting more than a decade ago with Ireland adopting a 12.5 per cent company tax rate.
Making the rich pay more tax is always a good political slogan, especially if they pay less than ordinary people and the revenue can be allocated to specific popular causes. Ireland’s low company tax rate boosted revenue sixfold in a decade but now there are calls for higher rates to help redistribute wealth.
Measures to protect tax revenue by closing loopholes for avoidance have so far proved a greater threat. The combination of rising public spending programmes and political resistance to higher tax rates puts pressure on the new combined Revenue & Customs to squeeze as much as possible from existing taxes.
Unless elections cut them short, Finance Acts typically contain hundreds of pages that are mostly designed to close loopholes. Some are intended to raise tax bills. Others, especially when not subject to consultation in advance, have unintended consequences that make life harder for multinationals, for whom tax planning is almost a profit centre in its own right.
This can work both ways. Arrangements to encourage film-making in Britain proved so costly that they were withdrawn in favour of more modest incentives.
Stamp duty on UK share transactions, a British rarity, presents a typical quandary. Use of financial derivatives such as contracts for difference has made the tax voluntary for the global investment banks that choose to base operations in the UK. So revenue is in decline and the tax has become unfair for small investors. But if the Treasury took action to protect the revenue, it could drive trade offshore or to rival continental centres.
Most of the official pressure from the EU is to harmonise rates upwards, but the reality is that tax competition is dragging company tax rates downwards across Europe.
Most of the EU member states from Central and Eastern Europe are seeking to emulate the lower tax rates and higher growth rates shown by Ireland and, more modestly, Britain. Slovakia’s 19 per cent tax rate and accommodating regime is turning it into the world’s biggest per capita car manufacturer. Poland, in response, has decided to move towards an 18 per cent flat rate tax, not just for companies. Further east, Russia and Romania have opted for even lower tax rates to combat mass evasion. Such low rates do present a direct threat to investment in the UK but not necessarily a big one. Danuta Hubner, Poland’s EU Commissioner, asks: “Why should foreign investors come if they do not get tax benefits to compensate for bad telephone lines and pitted roads?”
But high-tax Western Europe is having to respond. German corporation tax is to start at 19 per cent, the UK’s small company rate, and Austria is moving its main rate to 25 per cent. The UK may need to at least match that if investment in Britain is not to become a loser from tax competition.
source: Times Online - By Graham Searjeant�
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