Save content
Have you found this content useful? Use the button above to save it to your profile.

Corporation tax is a bad tax to devolve, MPs told

12th Nov 2014
Save content
Have you found this content useful? Use the button above to save it to your profile.

Corporation tax is “remarkably volatile” and open to “manipulation”, and devolution may require a system of formulary apportionment of profits, a devolution expert has told MPs.

The UK government is on track to meet a commitment to make a decision no later than the autumn statement on 3 December on whether to devolve corporation tax powers to Northern Ireland, financial secretary David Gauke said yesterday in a Parliamentary written answer.

The three major UK political parties have indicated agreement that corporation tax should not be devolved to Scotland, according to a paper published last month by the UK government’s Scotland Office. But the Scottish government argues that it should have “full autonomy” for the major taxes including corporation tax.

Professor Alan Trench, honorary senior research associate at the University College London Constitution Unit, gave evidence last week to the Commons Treasury Committee's inquiry into further devolution in Scotland.

He said corporation tax was “subject to a variety of means of manipulation by accountants and by others acting on behalf of … companies”. It was also a “disproportionately burdensome tax, particularly when it comes to its compliance cost on small business”.

Formulary apportionment

Stewart Hosie MP put it to him that if corporation tax were devolved to Northern Ireland, the arguments against devolving it to Scotland would “disappear like snow off a dyke”.

Trench said a system of formulary apportionment of profits might be necessary in the event of devolution.

“I think one difficulty with corporation tax devolution is that to do it in a way that does not create an incentive to brass plating and to shifting corporate transactions, you have to do the sort of approach that is used in Canada and the United States,” he said.

“You provide for different rates of corporation tax to be levied on the profits of companies in different parts of the state according to the proportion of their activity that is there, based usually on payroll.”

Formulary apportionment is advocated by many tax campaigners, who argue that the separate entity approach and the arm’s length principle, which underpin the current international tax system, are flawed. But opponents of formulary apportionment, a feature of “unitary taxation”, say that it is impractical and would not prevent profit shifting by multinationals who can choose where to locate employees and assets including intellectual property.

At the Treasury Committee hearing David Ruffley MP asked Edward Troup, HMRC’s tax assurance commissioner and second permanent secretary, what work HMRC had done to estimate the level of “profit shifting and revenue loss” should Northern Ireland get a lower corporation tax rate.

“I am not aware of any particular calculations of the estimate of any shifts of activities, but clearly it is something that might happen,” Troup replied.

Separate accounts

The Chartered Institute of Taxation said in a submission to the Smith Commission that business taxes “present problems because there is  always the possibility that two jurisdictions may or should have taxing rights”.

The CIOT added: “If corporation tax were to be devolved in full, a complex system similar to that operating in respect of taxation across international borders may have to be developed in the UK to ensure that tax accrues to the jurisdiction in which the [profit] arises.”

“The result might be a big increase in burdens on businesses that would have to keep separate accounts for Scotland and the rest of the UK.”

There was “a significant danger” that any benefits from having such powers might outweigh the costs of implementing such a system, it said.

Related articles:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.