Wednesday, 16 April 2008

Shire Pharmaceuticals relocates to Ireland

Here is a good summary. Before the right-wingers start yapping on about Ireland's 12.5% corporation rate, and before the Socialists start dreaming up ever more regulations, let me explain why the other changes in the MW manifesto are far more important:

The most recent figures available from Shire show it paid £8.8m in UK taxes in 2006, of which £4.2m was corporation tax.

1. The balance of tax it paid would be largely Employer's National Insurance, which will be scrapped, with a minimal overall cost to the Exchequer, but a huge boost to UK plc and employment figures.

2. Income from foreign subsidiaries will be exempt from tax, instead of being taxable in full with a corresponding credit for most of the corporation tax paid overseas. Loss to Exchequer after double-tax relief, maybe £1 bn or so, as Lord Forsyth's commission calculated back in 2006. As a quid pro quo, any spurious payments for interest payments, management charges or patent royalties to overseas subsidiaries will be disallowed for corporation tax.

3. Shire's UK source income would of course still be subject to UK corporation tax under either current rules or the MW manifesto. If it has a legitimate Irish business, then of course that will pay 12.5% over there, but a UK based holding company would pay no further UK corporation tax on dividends therefrom.

4. And VAT will be phased out anyway (once I've dragged us out of the EU), as it is the tax that distorts the economy most. This is far more important than reducing income/corporation tax rates.

5. The rule for short-term residents will be as in other European countries, for example, for the first five years, seconded employees will be taxed on UK salary only.

6. Stamp Duty on share transactions will be scrapped (as in most other European countries), static cost £4 bn, dynamic cost much less than that - we'd stop losing business to e.g. Dublin.

7. Capital Gains Tax on share sales will be scrapped (revenues £2 bn or so), as would, to be fair, R&D tax credits (cost £2 bn or so), but the cut in Employer's National Insurance on scientists' salaries will compensate for that*. Net overall cost to the Exchequer - minimal.

That's that fixed. Next problem.

* Scientist's salary £100,000. Employer's NIC around £12,000. R&D tax credit for large company is worth 25% x 30% x £112,000 = £8,400. Net cost of that scientist £103,600. Under MW manifesto, net cost £100,000.


John B said...

What's the point of having 0% tax on remitted profits from overseas? That leaves us on aggregate no better off whether a firm like Shire stays here or moves its domicile to Ireland (you don't seriously think that more than five bean-counters and a couple of tax lawyers will actually decamp, do you? Experian still has its real parent company HQ in London so it can be near the shareholders, as does Hiscox after it 'moved' to Bermuda...)

Go for 12.5% on overseas remittances, then UK plc still gets the tax haven benefits that it would get if domiciled in Ireland and Switzerland, while the tax burden is partly shifted to goods and services made by and sold to foreigners. Win-win.

I agree employer NI should be scrapped, along with employee NI, but the employer would need to raise its employees' salaries by a corresponding amount to make up for the nominal income tax rises that would be required to offset the increase. Oh, and all stamp duty should be scrapped, as it is probably the most stupid and distortionary tax that we have relative to revenue raised...

[also, how on earth are you going to stop "spurious payments" as a part of transfer pricing? There are literally thousands of highly qualified, highly-paid professionals in London alone who do nothing else other than to devise transfer pricing schemes that meet whatever rules the government puts in place to support 'spurious' piss-taking...]

Mark Wadsworth said...

Why 0% tax? Because most other European countries do it, that's why. And because it's simple, and because it wouldn't cost much, if anything.

I'd leave Employee's NI for now - gives total rate 31% as against 30%/28% corporation tax, so fairly flat.

NB - I am one of the "...literally thousands of highly qualified, highly-paid professionals in London ... who do nothing else other than to devise transfer pricing schemes", as I believe are you. There'd be a simple rule "no payment to any associated company abroad is allowable unless you can prove it is 100% totally legit". And people will wiggle out of it sometimes, so what?

John B said...

"Why 0% tax? Because most other European countries do it, that's why."

Are you sure? (NB I'm not a tax specialist, although I work alongside people who are and know something about tax accounting). Certainly in Germany you pay the standard corporation tax rate, and in France you have the precompte which generally works out the same.

Mark Wadsworth said...

Yes. I have just checked e.g. Netherlands, Germany, France, Italy, dividends from subsidiaries are either exempt or 95% exempt from corporation tax.