Why Northern Ireland’s Tax Changes Could Lure Multinationals
By Lee Curthoys, Corporate Tax Lead, Radius
The Republic of Ireland is known throughout the world for attracting foreign investment through its low corporation tax rate, which now stands at 12.5%. Northern Ireland, by contrast, follows the UK-mandated 20% rate. Not surprisingly, Northern Ireland has struggled in recent years to woo foreign direct investors away from its closest neighbor.
That state of affairs may soon change. Provided that certain political hurdles can be overcome, competition between the two border countries for foreign investment may become more balanced over the next few years after the introduction of new tax legislation.
Background on the Corporation Tax (Northern Ireland) Act
In March of this year, UK Royal Assent was given to the Corporation Tax (Northern Ireland) Act 2015 (“CTNIA” or “the Act”). The CTNIA is expected to promote not only domestic and foreign direct investment, but also jobs and economic growth. The Act transfers corporation tax rate setting powers from the UK government to the Northern Ireland Assembly. As a result, Northern Ireland will be permitted to set its own rate of corporation tax starting as early as April 2017.
The CTNIA is part of a recent trend of tax decentralization within the UK, which includes the introduction of similar legislation in Scotland (in 2012) and in Wales (in 2014). While unconfirmed, we expect that Northern Ireland will introduce a corporation tax rate at or around the Republic of Ireland’s rate of 12.5%. Until the change goes into effect, the UK rate will apply in Northern Ireland.
CTNIA Implementation Status
Implementation of the Act is currently stalled in the Northern Ireland Assembly. The delay can be attributed largely to political deadlock. Implementation of the CTNIA is contingent on passing welfare-reform legislation in Northern Ireland, and on delivering a balanced budget and other requirements.
It’s also worth noting that the general political climate in Northern Ireland has deteriorated in recent months. Old sectarian divisions have resurfaced and threaten to break apart the power-sharing Executive Committee of the Assembly. This dissention may further delay implementation of the CTNIA.
What the CTNIA Means for Multinationals Operating in or Considering Northern Ireland
Given the current impediments to implementing the Act, many companies operating in Northern Ireland are likely to adopt a “wait and see” approach with regard to corporate tax strategy, while of course monitoring ongoing CTNIA developments.
Companies considering a move into Northern Ireland find themselves in a similar position. The mere prospect of a possible corporation tax-rate change in April 2017 is unlikely to compel any company to expand into the country, especially considering a new tax rate hasn’t yet been determined. At the same time, while the CTNIA-related changes are unfolding, the UK itself is lowering its overall corporation tax rate, to an expected 18% by 2020. Companies considering a move may want to consider the differential between the UK and the Northern Ireland tax rate, which is currently difficult to determine and will almost certainly change over time.
Finally, the CTNIA is a complex document that will affect companies operating in Northern Ireland differently depending on their size, the nature of their in-country operations and other factors. For example, when the new corporation tax rate is finally implemented in Northern Ireland, it will apply only to companies that carry on a qualifying trade per the Act and pass either a small- or medium-sized enterprise (SME) test or large company test. Companies operating in Northern Ireland or looking to move to Northern Ireland may want to review the CTNIA rules in detail to determine their eligibility under the Act and to what extent they will benefit from it if it is implemented.
It’s worth mentioning in closing that there are other reasons besides corporation tax rates to expand into and operate in any country. These factors include host-country indirect tax rates, cultural norms, employer obligations, market opportunities and much more. Businesses must also be increasingly mindful that any restructuring of operations should be for genuine commercial reasons rather than for tax reasons. Tax authorities the world over are scrutinizing companies to make sure their transfer pricing and other tax practices are in compliance with local laws and not designed to avoid paying a fair share of taxes.