Enough with the Corporation Tax argument…

The continuing (long-running) saga of reducing Corporation Tax in Northern Ireland has a particular knack of shoving me close to the edge of the cliff. I have a series of problems with the arguments in favour of reducing corporation tax, the biggest of which is the fact that the argument is being made at all.

The argument has been made for a reduction in corporation tax in Northern Ireland to 12.5% (the same as that in the Republic) for a few years now. So many years, in fact, that we’ve even had a time for an inquiry into the matter. Which said that the UK government wouldn’t do it. Cue a wail of horror from Northern Ireland’s politicians. This leads me to my second problem, but more on that later…

The rationale against any cut in corporation tax in Northern Ireland is simple. It’s illegal. Under EU law, no member country can reduce taxation in a certain area of the state without it being deemed state aid. Either the change is made across the whole jurisdiction, or it’s not made at all. The legality of this has been tested in the European Court of Justice (thanks to the Portugese government) with reference to the Azores. To be certain of the situation, I read the opinion of the ECJ myself. Now, I’m no lawyer, but it is very clear that reducing corporation tax in the Azores was deemed illegal because “The settled practice of the Commission … consists of classifying as aid tax schemes applicable in particular regions or territories which are favourable in comparison to the general scheme of a Member State …” In other words, the tax scheme in the Azores, which would have allowed for lower rates of income and corporation tax than those in the Portugese mainland, would have been favourable in comparison to the rates in the rest of Portugal, producing an unfair advantage deemed as state aid.

Stay with me. The ruling also highlighted that the European Commission might have ruled that the proposed system for the Azores was legal, if the rules applied to firms operating outside the financial sector, but it didn’t even find this because “the reduced rates of income and corporation tax are not justified by their contribution to regional development and their level is not proportional to the handicaps they are intended to alleviate.” In other words, the system went beyond just alleviating a supposed handicap inherent in the peripherality of the region and produced an unfair advantage to the Azores over the rest of Portugal.

The UK government added its weight to the argument in support of the Portugese government, largely saying that if the court found in favour of the Commission on the basis that tax rates had to be equal across the whole of a member state, then this called into question the possibility of devolving fiscal autonomy to particular regions, as well as the whole concept of devolution. Or, simply, no UK government would ever be able to offer Scotland, Wales or Northern Ireland the possibility of tax raising powers within their own legislative jurisdictions. For good measure, Spain supported the UK and Portugese arguments before the Court with reference to the issue of devolution.

The ruling of the ECJ is clear on this matter – lawyer or no lawyer. It outlines three scenarios where the issue of state aid might arise in reference to taxation policy, one of them being that if a regional or local authority “in the exercise of sufficiently autonomous powers” adopts a different tax rate from the national power. The ruling goes on to say that to be sufficiently autonomous “that decision must, first of all, have been taken by a regional or local authority which has, from a constitutional point of view, a political and administrative status separate from that of the central government. Next, it must have been adopted without the central government being able to directly intervene as regards its content. Finally, the financial consequences of a reduction of the national tax rate for undertakings in the region must not be offset by aid or subsidies from other regions or central government.” [Italics are my own emphasis]. To further augment this point, the ruling continues, that to satisfy EU law on political and fiscal independence from central government, not only must the regional authority have “powers in the territory within its competence to adopt measures reducing the tax rate..but that in addition it assumes the political and financial consequences of such a measure.” [Again, my italics].

The sticking point in the entire argument is that given their insularity and peripherial status, the Azores suffer from structural disadvantage from the rest of Portugal. So, it is incumbent, based on Portugese law, for the Portugese government and the autonomous authority in the Azores, to correct these structural imbalances whilst ensuring appropriate levels of public services. So, like Northern Ireland, the Azores benefits from a direct transfer of money from central government to ensure the delivery of appropriate levels of public services, meaning that any reduction in money to the Azores from a reduction of corporation tax would be offset by an increase in the direct transfer of money, resulting in an unfair advantage for the Azores…

My difficulty with the situation in Northern Ireland, with our local politicians and many senior business leaders calling for the government to cut corporation tax is based on a lack of leadership. It’s been deemed illegal by the European Court of Justice, so why even make the argument in the first place? Secondly, I’ve seen arguments made by the DUP (though I may have been dreaming) that to offset the loss of revenue from reducing corporation tax, the block grant (amount of money given by London to Belfast, Edinburgh and Cardiff) could be increased before being reduced. I say good luck to the DUP in trying to make that argument to Westminster. I also believe that the issue is more about what is being done to promote entrepreneurial talent from within Northern Ireland than seeking to base any growth on foreign investment. This is where leadership is sorely lacking.

Essentially, I take the view that our local politicians continue to make the argument about cutting corporation tax to extract further monetary concessions out of London, safe in the knowledge that if neither comes they can continue to wail that the politicians in Westminster took their dummy away. With the new Prime Minister visiting Belfast today, inevitably attention was focused on the corporation tax issue. Cleverly, the new coalition agreement, also published today, has a clever little mechanism to allow London off the hook altogether, and, to potentially hand the decision making power over to local politicians in Northern Ireland. The agreement simply states that the government in London “will work to bring Northern Ireland back into the mainstream of UK politics, including producing a government paper examining potential mechanisms for changing the corporation tax rate in Northern Ireland.” That mechanism, I predict, will be the transfer of tax raising powers to the Northern Ireland Assembly. And given that politicians in Northern Ireland have abdicated fiscal responsibility (re water charges) in favour of populism, I doubt very much that they are willing to assume the political and financial consequences of actually having to forgo a considerable chunk of money…

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Filed under Northern Ireland, Northern Ireland Politics, UK Politics

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