Introducing this lower tax rate is likely to impact both the Republic of Ireland and the rest of the UK, because taxpayers will have more choice of head-quarter location.
Competition: UK
For the UK, the immediate concern will be that the lower tax rate in Northern Ireland opens up domestic transfer pricing challenges for taxpayers and the authorities.
“UK-UK transfer pricing is already an issue for entities within the UK subject to different effective tax rates, for example banking or oil and gas surcharges, and a different tax rate in Northern Ireland brings another potential transfer pricing challenge,” said Shiv Mahalingham, managing director at Duff and Phelps.
Another concern will be whether it will lure foreign investors away from London and towards Belfast. The main drive behind the campaign for lower tax in Northern Ireland was to create economic growth and jobs in the region by attracting foreign investment.
Competition: Ireland
This competition is even more concerning for the Republic of Ireland.
“I think Northern Ireland and a reduced tax rate will offer a significant threat to Ireland,” said Martin Phelan, head of tax at William Fry Taxand. “It is going to have a very attractive rate of tax. I think it may make existing projects [in the Republic of Ireland] consider relocating to the North and new projects may just go straight to the North.”
An attractive tax rate is a big draw for companies when setting up in a new country however other factors also come into effect.
Foreign direct investment (FDI)
“There are a number of determinants of FDI and so multinational groups may consider the Northern Ireland versus Republic of Ireland tax differential as part of a wider treatment of factors including access to skilled labour, operation in a Eurozone location and proximity to key markets,” said Mahalingham.
Northern Ireland, as part of the UK, can offer benefits that are not available in the Republic of Ireland.
“You can’t ignore in Northern Ireland you’re part of the UK, you’ve got lots of tax treaties to your advantage, a great one particularly with the US. You also have to look at standards of living and personal costs and employee costs. In Northern Ireland the index level is lower than the Republic of Ireland,” said Phelan.
Beginning of a trend?
Phelan also indicated that, by Westminster accepting this move from the Northern Ireland assembly, it may be a sign that the rest of UK is looking to drop its corporate tax rate.
“Allowing a drop from 18% to 12.5% is probably telling you of where Westminster is heading with its tax rate. Watch this space for mainland UK as well,” said Phelan.
