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U.K. Corporate Tax Reform is Attracting Business

3 min readBy: William McBride

The U.K. is most of the way through a multiyear taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform that has drastically reduced the corporate tax rate and otherwise cut taxes on multinational corporations (MNCs). Their motivation for doing so was the loss of business to nearby competitors, such as the Netherlands and Switzerland, which had comparatively low corporate taxes. Since 2007 the U.K. has cut the corporate tax rate from 30 percent to 23 percent today, and is set to cut it further to 20 percent next year. In 2009, the U.K switched from a worldwide tax systemA worldwide tax system for corporations, as opposed to a territorial tax system, includes foreign-earned income in the domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. with foreign tax credits (similar to the current U.S. system) to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. which largely exempts from domestic taxation the foreign profits of MNCs. The U.K. also introduced a “patent boxA patent box—also referred to as intellectual property (IP) regime—taxes business income earned from IP at a rate below the statutory corporate income tax rate, aiming to encourage local research and development. Many patent boxes around the world have undergone substantial reforms due to profit shifting concerns. ”, which applies a reduced 10 percent tax rate to profits derived from patents and other intellectual property, to be phased in over five years beginning last April.

There were some other changes too, and not all of them helpful for business investment, such as the lengthening of depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules. However, on balance it appears the reforms have turned the tide in terms of the attractiveness of the U.K. as a multinational headquarters, according to the latest reports from The Telegraph and Ernst and Young:

The Uk's "competitive” and “predictable” tax regime has led to a 50pc rise in the number of companies wanting to relocate here, data by accountancy giant EY reveals.

The firm has told The Telegraph that approximately 60 multi-national companies are considering relocating either their global headquarters or a regional headquarters to the UK as a result of the Chancellor’s reducing corporation tax policy.

The figure is 50pc higher than the 40 companies EY said were in its pipeline in October 2012, 20 of which are known to have relocated.

John Dixon, EY’s UK head of tax, said that the 60 companies would bring “well over” £1bn of tax revenues, including corporation tax, to the UK, along with 5,000 jobs.

“The trend of foreign multi-nationals looking to relocate continues apace” said Mr Dixon. “That trend has also widened in terms of countries of origin, from predominantly the US, to Ireland and other parts of Europe.”

Further evidence comes from a new study by European economists who find that the U.K. has become more competitive in mergers and acquisitions since the switch to territorial taxation in 2009. The researchers find a similar effect in Japan, which also switched to a territorial system in 2009:

We find empirical evidence for repatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. taxes reducing the competitiveness of investors from tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. countries in the international market for corporate control. The economic importance of this effect depends on the level of the domestic profit tax rate in place. The larger the domestic profit tax rate, the larger the repatriation taxes due. Since the Japanese profit tax rate (40.69 %) in 2009 is higher than the U.K. profit tax rate (28 %), the reform effect is more pronounced for Japan than for the U.K. We estimate the Japanese 2009 abolishment of the tax credit system to have increased the number of international mergers and acquisitions with a Japanese acquirer by 31.9 %. The estimated effect for the U.K. is only 3.9 %. We finally simulate a U.S. switch from credit to exemption. According to our results, such a reform of the U.S. international tax system would increase the number of international mergers and acquisitions with U.S. acquirers by 17.1 %.

Meanwhile, the trickle of companies leaving the U.S. continues unabated, most recently with the purchase of Jim Beam by a Japanese firm.

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