By lowering corporate and intellectual property taxes the UK is after a larger slice of the FDI cake

Here’s a question. “With low tax, less regulation and a talented workforce, X is one of the easiest places to start a business”; so what’s X?

Ireland, I hear you say? No, it’s a message the UK’s equivalent of the IDA is sending out about the region. And one which is starting to cause some concern that our closest neighbour might just be out to steal our lunch.

Indeed while Ireland’s ability to attract foreign direct investment (FDI) is something we hear a lot about, it’s easy to forget just what a formidable force the UK is when it comes to attracting FDI.

While it might have had a patchy record in years gone by, cracking down on controlled foreign corporation (CFC) rules, it’s putting up a very different front today.

“In the last two or three years it has really got its act together,” notes Adrian Crawford, a tax partner with KPMG.

Indeed in 2011, the UK attracted more projects than any other European country, generating more than a thousand new jobs each week, as some $53.9 billion poured into the region.

And with a stated goal of becoming the most competitive tax system in the G20, the UK is becoming more and more attractive as it reduces its headline corporation tax rate down to 21 per cent, introduces an innovation or “patent box”, and facilitates an RD regime that doesn’t depend on a base year – as it does in Ireland.

Technology hub

After all, while we might like to think of Ireland as the European technology hub, home to Google, Facebook and “Silicon Docks”, the UK has proved itself to be more than adept at attracting such names.

In October, EON Reality, an American 3D technology specialist, chose Manchester as the location for its new European headquarters, while US software giant MapR, will open the doors to its new London site in January.

But why London?

Despite recent efforts to gradually reduce the headline corporation tax rate, the UK still remains far less attractive than Ireland, and the cluster of companies in sectors like medical devices, pharma and social networking must be a pull. However, it’s also a disadvantage, as companies struggle to hire staff in these rapidly growing sectors.

According to Jack Norris, VP of marketing with MapR Tech, the choice of London was influenced by the fact that some of its partners were already located there, as well as of some of the personnel that they were hiring.

When enterprise social networking provider Yammer was looking to launch a European office in 2011, it opted for London because of its access to skilled employees.

It started out with just three staff initially working from each other’s living rooms, and for Georg Ell, general manager of Yammer EMEA, being a part of London’s tech community was important to its development.

“The community is very supportive in helping with anything a business needs to become established. For very young start-ups it’s really valuable as it attracts investment and offers a pool of talent. Any area with a tech culture needs these qualities,” he says.

When Yammer decided to expand, and open its first developer centre outside of San Francisco, London was again the best option.

“We decided to open our developer centre here because of that pool of talent,” he says, adding that the company now employs 80 people, and is in a “fortunate position to give back to the tech city community through mentoring and networking”.

Intellectual property

But while London might be gaining, Ireland is losing.

And it might get worse next April when the UK takes pole position in how intellectual property is taxed.

According to Cormac Kelleher, tax manager with Mazars, up until recently Ireland, which introduced a capital allowances regime for IP back in 2009, was ahead of the game.

This, he says, was “very, very advantageous” and made a lot of companies look at Ireland.

However, the UK followed suit by introducing similar capital allowances, and is now about to get one step ahead. From April 2013, companies based in the UK will be able to pay tax on income royalties and patents at just 10 per cent, due to its “patent box” regime.

“We were ahead of the UK for a while, but they are now approximately 2.5 per cent better off than we are,” notes Kelleher, referring to Ireland’s 12.5 per cent tax regime.

Northern threat

As of yet, the implications of the UK’s patent box move are uncertain. However, for Kelleher, it’s not just the UK that poses a major threat.

“The biggest thing we should be thinking of is what’s going to happen up the North. If it gets the autonomy to create its own corporation tax rate, it could then try and match the 12.5 per cent on everything else, and it would also have the patent box on IP,” he says.

Indeed during the summer Mark Ennis, the chairman of the North’s business development agency, revealed that “at least two companies” which were earmarked to locate in the Republic changed their minds and were planning to invest in Northern Ireland because of the new patent box regime.

For Crawford, “that’s just the start”, adding that he is starting to see international investors’ perceptions of Ireland change.

“What worries me is that I’m just starting to see it; it takes a while for these changes to sink into people,” he says, adding, “the competition is starting to pass us by because we’re not moving at the same rate of knots that they are”.

Missed opportunity

In this regard Kelleher is disappointed that more measures aimed at incentivising and attracting FDI were not announced in the Budget.

“It’s a missed opportunity that they didn’t introduce more measures in the Budget,” he says, adding that Ireland’s tax regime for foreign executives, the SARP, which was introduced in last year’s Finance Bill, is not as attractive as it could be.

But if the UK is storming ahead, it might face an abrupt decline in popularity amongst multinationals given the stance it is taking against the likes of Starbucks and Amazon, who pay little tax in the UK – despite doing a considerable amount of business there.

By sticking their heads up above the parapet and commenting on the tax haven type practices that are going on in the UK, politicians are invariably drawing comparisons with Ireland. Although that never did us any harm.