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UK Moves Towards Lower Corporate Tax Rates

Last week, in what is starting to seem like a race to corporate tax bottom, UK Prime Minister Theresa May announced that her administration still plans to drop the country’s corporate tax rate.

Speaking before the Confederation of British Industry (CBI), May said she wants the UK’s corporate tax rate to be the lowest among those in G20 economies, going as far as suggesting that it might drop to below 15 percent in an effort to compete with Donald Trump’s campaign promises across the Atlantic.

During the US Presidential elections, Donald Trump vowed to slash the US’s corporate tax rate to 15 percent, a significant fall that would purportedly motivate US multinational companies to set shop locally rather than move their business abroad.

As reported by Tax Foundation, the US “has the third highest general top marginal corporate income tax rate in the world, at 38.92 percent,” only surpassed by the UAE and Puerto Rico.

May’s recent comments before the CBI were confirmed by Chancellor Phil Hammond’s Autumn Statement in which he remarked, “Corporation tax will fall to 17%, by far the lowest overall rate of corporate tax in the G20.”

The US is #1 in corporate tax rates

UK Business, Tax Activists & Pundits Voice Concern Over Corporate Tax

Following this confirmation, several UK businesses expressed their concern, highlighting the fact that the public would be skeptical about reducing the corporate tax to 15 percent.

As reported in The Financial Times, “a poll by PwC, the professional services firm, found that nearly three out of four businesses did not want the rate to fall below 17 per cent,” arguing that “further cuts would not help build trust between business and the public.”

Robin Walduck, Tax Partner at KPMG, remarked that “further corporate tax cuts were not enough on their own to encourage foreign direct investment to the UK,” but local companies would be open to the Prime Minister’s “promise to create a tax system that was ‘profoundly pro-innovation.’”

Speaking on behalf of Tax Justice Network, Taxlinked member Alex Cobham told The Financial Times that “it would be foolish to match a US cut to 15 per cent, because it ignored the impact of state taxes that pushed up the US rate by several points,” and referred to such a move as one of “economic recklessness.”

Furthermore, a November 29th article in The Economist called May’s position vis-à-vis corporate taxes as “a distraction” for the country.

According to the article, “A marginal decline in corporate tax pales in comparison with firms’ worries over workers’ measly productivity growth, Britain’s future relations with the EU or Mrs May’s refusal to guarantee the rights of the 3.5m EU citizens currently living in Britain.”

At the other side of the spectrum, Leonid Bershidsky, who works as a columnist for Bloomberg View, believes corporate tax should be altogether abolished.

“In the U.S., the U.K. and elsewhere corporate taxation is a crazy quilt of deliberate exemptions, accidental loopholes and, in some cases, special sweetheart deals,” he writes.

Additionally, Bershidsky says, “Because of everything companies do to game it, the tax distorts financial reporting and creates a lot of needless work for lawyers, accountants and tax agents, imposing a high transaction cost on business and society,” while also creating “ugly, unfathomable corporate structures that abuse globalization.”

Finally, Bershidsky remarks that, at the end of the day, corporate taxes do not add much revenue to a country’s GDP.

Based on OECD statistics, he writes, “the average contribution in developed nations is just 2.8 percent of gross domestic product,” and “in both the U.K. and the U.S. it's even lower, 2.45 percent and 2.6 percent, respectively.”

Northern Ireland Worried About May’s Corporate Tax Move

Northern Ireland Worried About May’s Corporate Tax Move

Northern Ireland is also somewhat concerned by May’s decision to slash the country’s corporate tax rate.

In an effort to attract more foreign direct investment, authorities in Northern Ireland will drop its current corporate tax rate to 12.5 percent in 2018.

However, there’s growing concern that if the UK pushes through with its own corporate tax cut, it would jeopardize Northern Ireland’s own efforts.

According to economist Andrew Webb of Webb Advisor, "from Northern Ireland's perspective, every cut to UK corporation taxes further erodes the expected benefit from reducing our own rate to 12.5%,” and “reduces the cost of implementing it here."

Webb also argued that it might be time for Northern Ireland to look for a backup plan in case the UK moves on with its cut.

"Perhaps it is time for Northern Ireland to think of a Plan B. How about we give a three-year corporate tax exemption to new local business-starts? That might unleash a wave of entrepreneurship and creativity of our own," he added.

What do you think?