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Scottish corporation tax presents greater avoidance risk than devolution to NI, says Gauke

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A Scottish corporation tax would present ‘greater opportunities’ for groups to shift profits than a Northern Ireland corporation tax, David Gauke has told MPs, but the Treasury’s own consultation document suggests that the current transfer pricing exemption for SMEs may have to be withdrawn if devolution to Northern Ireland goes ahead.

Devolution of corporation tax powers to Scotland could increase the risk of tax avoidance and arbitrage, the Exchequer Secretary to the Treasury argued during a debate on the Scotland Bill. The Calman Commission did not recommend devolving corporation tax, Gauke said, because ‘substantial practical profit shifting issues would arise’.

‘Tax competition’

Stewart Hosie, the Scottish National Party MP for Dundee East, claimed that the case for devolving corporation tax was ‘clear’. Scotland’s economy had grown more slowly, relative to the UK and the average of small EU countries, than it ‘ought to have done’ over the past 30 years, he said.

‘We believe that for Scotland to fulfil its economic potential, additional levers are required and corporation tax is, I believe, a key mechanism,’ Hosie added.

‘It can be an important tool in helping to support increased business start-ups, increased business research and development and investment, and in encouraging more firms to locate their headquarters in Scotland – the very reasons, I suspect, why the UK government announced a lower corporation tax rate and a strategy for reducing it further.’

Alan Reid, Liberal Democrat MP for Argyll and Bute, suggested that if there are different corporation tax rates in different parts of the UK and Hosie’s argument is correct, ‘surely every part of the UK will enter into a competition to reduce corporation tax, and we will end up with a race to the bottom to the detriment of all parts of the UK’.

Hosie replied: ‘I do not want to a race to the bottom, but I do believe in tax competition.’

Scotland Bill

The Scotland Bill completed its third reading in the Commons on 21 June. It provides that the Scottish Parliament may set a rate of income tax for Scottish taxpayers and legislate for devolved taxes including stamp duty land tax and landfill tax.

Hosie: ‘Corporation tax is a key mechanism and can be an important tool … encouraging more firms to locate their headquarters in Scotland’

Gauke said the Scottish government had requested that additional powers be included in the Bill, including powers over corporation tax and alcohol duties. ‘I understand that the First Minister has met colleagues in the government to highlight those requests,’ he said.

‘In those meetings, the First Minister agreed to provide detailed written analysis of the benefits to both Scotland and the UK of devolving those powers. No such papers have yet been provided. We await them with interest, because we have yet to hear the case made in detail.’

Northern Ireland

The UK government is consulting on the possible devolution of corporation tax powers to Northern Ireland, to ‘enable it to attract and expand private investment’.

But Gauke told MPs that ‘given the geographic proximity of England and Scotland, the integrated infrastructure, the large number of big GB-owned groups with a substantive presence on both sides of the border, and the relatively large and complex nature of the Scottish economy, there are likely to be greater opportunities for groups to shift profits there than may be the case for Northern Ireland’.

HM Treasury: ‘To protect Exchequer revenue from avoidance following the introduction of a differential corporation tax rate within the UK, the government might need to consider removing [the transfer pricing exemption for SMEs]’

The consultation closes on 1 July. The Treasury’s own consultation document said that if a separate corporation tax were introduced, Northern Ireland would have to bear the cost of an additional ‘anti-avoidance compliance resource’, ensuring that only ‘genuine’ economic activity within Northern Ireland benefited from the new regime.

It added: ‘There is currently an exemption from transfer pricing rules for small and medium-sized enterprises within the UK. To protect Exchequer revenue from avoidance following the introduction of a differential corporation tax rate within the UK, the government might need to consider removing this exemption.’

‘Avoidance opportunities’

The Calman Commission recommended in its report Serving Scotland Better: Scotland and the United Kingdom in the 21st Century, published in June 2009, that part of the Scottish Parliament’s budget should be found from devolved taxation under its control rather than from grant from the UK Parliament. The Scottish Variable Rate of income tax should be replaced by a new Scottish rate of income tax, it said.

But the Commission rejected the devolution of corporation tax, having sought views on whether the creation of a Scottish rate would result in ‘harmful tax competition’.

‘Some replies recognised the potential for Scotland to use corporation tax as an economic development policy instrument, whilst others noted the consequences in terms of both compliance costs relating to businesses operating across the border and the creation of tax avoidance opportunities by the creation of a second corporation tax regime in the UK,’ the Commission said.

The Bill ‘meets the objectives of strengthening Scottish devolution within the United Kingdom and in particular providing strong financial accountability to the Scottish Parliament,’ Michael Moore, the Secretary of State for Scotland, told MPs. It will now be considered by the House of Lords.