U.K. Corporate Tax Reform is Attracting Business
January 22, 2014
The U.K. is most of the way through a multiyear tax 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 system with foreign tax credits (similar to the current U.S. system) to a territorial tax system which largely exempts from domestic taxation the foreign profits of MNCs. The U.K. also introduced a “patent box”, 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 depreciation 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 repatriation taxes reducing the competitiveness of investors from tax credit 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.
Follow William McBride on Twitter