ANALYSIS:Britain cannot afford our low rate of corporation tax, but it is making its system simpler, writes COLM KEENA

THE ANNOUNCEMENT this week that the British government intends to sharpen its tax competitiveness received a less than overawed reception from Irish tax practitioners.

London had already announced its intention to reduce corporation tax to 24 per cent from 28 per cent over the coming four years.

However, in its announcement on Monday it said that from April 2013 the UK will have a “patent box” whereby profits from patents will be subjected to a special tax rate of 10 per cent. Also from next year profits of foreign branches of UK companies will not be subjected to corporation tax.

These measures were just part of what was outlined in a lengthy document devoted to making the UK corporation tax regime simpler and more competitive.

“In recent years, too many businesses have left the UK amid concerns over tax competitiveness,” said secretary to the treasury David Gauke. “It’s time to reverse this trend. Our tax system was once viewed as an asset. And it needs to be an asset again.”

Pádraig Cronin, a tax partner with Deloitte, says the latest move by the UK is in large part a consultation process, which makes it difficult to market internationally. Multinationals crave certainty, he says, and the UK continues to grapple with the perception that uncertainty surrounds how it will treat multinationals that locate there.

By way of contrast, Ireland continues to have its 12.5 per cent corporation tax rate. “We have a clear simple message.”

Cronin believes Ireland grew lazy over the past number of years about going out to sell itself. The recent turmoil affecting the State’s finances and the euro zone generally has not helped either.

On the other hand, he says, the four-year plan provides some certainty for multinationals considering settling here. “Most multinationals have rolling five-year plans. We have a four-year plan.”

One of the central planks of the plan is to make Ireland more competitive. “The next two years may be the best time of all to establish a new business in Ireland. Fresh recruitment can get you staff at 20 per cent less than people with existing businesses,” says Cronin.

While the UK’s move was prompted by concerns caused by companies leaving there for locations such as Ireland, Switzerland and elsewhere, Cronin said most of the companies that came here have contributed little to the exchequer. This is because the tax regime they were seeking to avoid doesn’t exist here. And these companies have not, by and large, created much by way of incremental activity.

As a former member of the Innovation Task Force and a member of that body’s post-report implementation team, Anna Scally of KPMG is concerned about the UK ambition in relation to patents.

She points out that the proposal was first mentioned by the UK last year, when it was feeling the heat in terms of tax competition.

While the UK is promising to introduce such a measure, the four-year plan for Ireland envisages the closing down of the scheme we have for sheltering income tax from patent earnings.

The shelving of the scheme was recommended by the Commission on Taxation but she believes changes introduced in recent years have dealt with perceptions that may have existed that the measure was being abused.

“Fairness is fine but we want the kind of people who do things that are beneficial to the economy . . . We are trying to stimulate the smart economy.”

Even when its corporation rate is reduced to 24 per cent the UK is not a great threat to Ireland in terms of competing with our 12.5 per cent. It is more difficult for larger economies such as the UK, with their large indigenous corporate sector, to reduce corporation tax. “They would like to go lower, but they can’t afford to. They want to have the lowest corporation tax rate in the G20.”

Noel Cunningham of Mazars says the no-tax-on-foreign-profits measure is clearer and cleaner than our double taxation agreements which can lead to the same outcome.

He points out that as of last year dividends from abroad to UK companies are exempt from tax, something the Government has been pressed to introduce.

“Here you get a credit but the UK system is cleaner. We’re a bit vulnerable on that one.” The favourable rate being introduced on royalty profits is also an attractive aspect of the UK offer.

“My reading of it is that the UK is going to force us to be more competitive on the non-tax-rate factors. Maybe our low tax rate has made us a bit lazy in relation to the other areas. Our tax rate is attractive but it is not enough.”