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‘We are in a global race,’ says Gauke as MPs debate corporation tax cut

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A Conservative MP and former tax lawyer has called on the government to consider restricting corporation tax deductions for interest and royalties to ‘put our home businesses and multinational businesses from overseas on a much clearer, more level playing field’.

Charlie Elphicke, the MP for Dover, who has been critical of tax avoidance by some large multinationals and was reported last October to have suggested that the chancellor should consider a ‘minimum tax’ rule for companies, was speaking during a House of Commons debate on the Budget. However, he was one of many MPs who welcomed the proposal to reduce the main corporation tax rate to 20% from April 2015, while critics have warned that the government is engaging in a damaging ‘race to the bottom’.

Last week’s Budget announced that the government will consult on a ‘package of proposals to modernise the corporation tax rules governing the taxation of corporate debt’ with a view to legislating in Finance Bill 2014 and Finance Bill 2015. The reform will include measures ‘to clarify and strengthen the structure of the legislative regime and to update aspects of the detailed rules’. There is no suggestion that the reform will include a restriction of existing reliefs.

The OECD’s review of the international corporate tax system, however, will include consideration of the tax treatment of cross-border interest payments, the government said in a House of Lords written answer in January. The OECD confirmed last month that its action plan, to be presented to G20 ministers in July, will include proposals to develop rules on the treatment of intra-group financial transactions, ‘such as those on deductibility of payments’.

Michael Wistow, head of tax at the law firm Berwin Leighton Paisner, warned before the Budget that the UK should avoid taking any unilateral action to force multinationals to pay more UK tax. He argued that ‘jumping first’ would deter investment.

But Elphicke said: ‘Personally, I would like us to go further and see whether we can reduce corporation tax still more by restricting tax reliefs … We should look at minimising deductions for interest and royalties, along with other deductions that are available in the tax system.’

His comments echoed a Financial Times editorial in January which argued that there were ‘things countries can do unilaterally to make [corporation tax] tax less optional’. It suggested that ‘a hard limit on the deductibility of payments to foreign affiliates, including the interest paid on intra-group debt, would make it harder for multinationals to shift profits to low-tax jurisdictions’.

The FT reported yesterday that ‘US lawmakers are considering limiting the tax deductibility of interest payments for businesses, a measure that would dramatically transform corporate finance in America by reducing the bias towards debt in the tax code’.


Last week the FT noted that the chancellor ‘must hope that his tax cuts reverse the recent signs that Britain’s once stellar performance in inward investment has been faltering’. It reported: ‘The UN said in July that while the UK had the world’s second-largest accumulated stock of foreign direct investment by value, it had slipped from second to seventh for inflows.’

During the Commons debate several MPs welcomed the further reduction in the corporation tax rate. Gavin Williamson, Conservative MP for South Staffordshire, said: ‘The constant drive to lower corporation tax will build confidence across the globe that Britain is a place in which to invest.’ David Ruffley, Conservative MP for Bury St Edmunds, said he believed there could be a case for deeper cuts in corporation tax ‘to approximate more closely the Irish model; Ireland has 12.5% corporation tax, which makes it more of a magnet for foreign direct investment’.

Investment ‘is stagnating’

But Adrian Bailey, Labour Co-operative MP for West Bromwich West, said: ‘We have heard a lot in the debate about the impact of corporation tax and making this country an attractive place for inward investment, but the reality is that investment is stagnating.’

He added: ‘A large amount of money will be forgone with the reduction in corporation tax. Would that money not be better spent by providing better investment allowances, which will enable British companies to invest, employ and export more, and generally to contribute to the economy? A lot of companies that invest here do not pay much tax anyway, and those that might come could as equally be attracted by an attractive investment allowance regime as a reduction in corporation tax. So far, the evidence in favour of a reduction in corporation tax is not strong, which is why we are not seeing the level of investment that the government had hoped for.’

Steve McCabe, Labour MP for Birmingham Selly Oak, said stimulating inward investment by cuts to corporation tax was ‘a government mantra’. He added: ‘It is not working, however. Foreign direct investment inflows to the UK fell between 2010 and 2011, and are now about a third of what they were before the crash.’

‘We must ensure that we are competitive’

David Gauke, exchequer secretary to the Treasury, said: ‘We must recognise that we are in a global race. There will be economies that succeed and those that fail. We must ensure that we are competitive. That is why we have cut the corporation tax rate again to 20% – the lowest rate in the G20. It is striking how the UK is now recognised as having a very competitive tax system.’

Winding up the Commons debate last night, Danny Alexander, chief secretary to the Treasury, said he wanted to talk about the steps the government had taken to build ‘a stronger economy and a fairer society’.

Alexander said: ‘We are putting our faith in the private sector to help us build that stronger economy. We believe that the best way to do that is to create the most competitive tax regime in the G20. Further reducing the rate of corporation tax … will not only send a clear message that Britain is open for business, but will increase the return on those businesses’ investments and incentivise economic growth.’

‘Food for thought’

During a House of Lords debate on the Budget, Labour peer Lord Eatwell noted that the chancellor had ‘boasted that “headline” UK corporation tax will be far lower than headline corporation tax in Germany or the US’.

He added: ‘Did not this boast give him some food for thought? Has he not noticed that the US economy, despite political problems between president and congress, has sustained its underlying dynamism through the crisis and has already grown to levels of output way above the pre-crisis peak, while UK output languishes 3% below the peak? Has he not noticed the superior industrial performance of Germany, even among the difficulties of the eurozone? Has he not thought to ask himself: “If their taxes are so much higher than ours, how come they are doing so much better than we are?”’

In his book The Great Tax Robbery, published earlier this month, Private Eye writer Richard Brooks argued that the UK government uses a ‘misconception’ – that the burden of corporation tax is passed on to employees – to justify ‘ultra-low corporate tax rates’ and a programme of reform to introduce what Brooks called ‘a whole new world of tax avoidance opportunity’.

Brooks suggested that ‘quite why the world’s seventh largest economy should sell itself so cheaply looks like a mystery’. But this was explained, he added, ‘simply by the corporate capture of tax lawmaking’.

‘Race to the bottom’

Polly Toynbee, columnist for The Guardian, claimed that George Osborne’s ‘instruments of growth’ included ‘a cut in corporation tax to propel us in a mutually destructive global tax race to the bottom’.

There are signs that some leading tax professionals, at least, are not expecting further reductions in the headline rate. Writing in last week’s Tax Journal Chris Sanger, global head of tax policy at Ernst & Young, said the reduction to 20% was welcome, but added: ‘We would not expect any further reductions now that the main and small profits rates will be harmonised.’

The Institute of Directors, on the other hand, believes that the chancellor should go further. Richard Baron, head of taxation at the IoD, said in response to the Budget: ‘Twenty per cent will put us out ahead of most of the OECD. But [the chancellor] will need to go further in future Budgets. A medium-term target of 15% would be ideal.’

How competitive?

If other countries do not undercut the UK, the reduction of the main rate to 20% means that in 2015 the UK will have ‘the lowest main rate of corporation tax in the G20, alongside Russia, Saudi Arabia and Turkey’, the Oxford University Centre for Business Taxation noted.

But it pointed out that the rate of any allowance for capital investment is also important, since ‘this determines the size of taxable profit that is taxed’.

Each year the Centre for Business Taxation calculates two measures of effective tax rates for G20 countries, taking into account allowances for investment.

In 2015 the UK will have the fifth lowest ‘effective average tax rate’, a measure of the proportion of total profit taken in tax, it said. The UK will have the ninth lowest ‘effective marginal tax rate’, being ‘the percentage increase in the required rate of return on an investment resulting from the tax’.