Henderson and Charter relocate to Ireland (short version)

My previous post ended up offputtingly lengthy (it is Saturday, after all), so here's the summary:

If we want to stop holding companies relocating from the UK to Ireland, the best and simplest solution is to exempt dividends from overseas subsidiaries from corporation tax, which is what most other European countries do. The fall in corporation tax revenues would be about £1 billion per annum (or 0.16% of all government tax receipts), which might be more than offset by the increase in other UK revenues (salaries, PAYE, office rents etc).

Henderson and Charter to relocate to Ireland

Here's a fair summary from The Grauniad:

Asset management firm Henderson and engineering group Charter have followed other companies in announcing plans to relocate to Ireland for tax reasons, rekindling fears of an exodus of British businesses. Others are considering their options, including Brit Insurance, which said this week it was "actively considering the issue of tax domicile". Henderson said yesterday it would set up a new holding company in Ireland to keep its tax rate to about 20%*. The company has enjoyed a low tax rate in recent years but this is due to rise next year to the normal UK corporation tax rate of 28%."

George Osborne, who doesn't understand tax has reacted with tiresome predictability:

George, the Shadow Chancellor, blamed the exodus on the confusion created by Labour's dithering over the business tax regime and the fact that we have some of the highest corporate tax rates in the EU**. He called on Darling to adopt our plans to reduce the main rate of corporation tax from 28% to 25% and simply [sic] the business tax system***

Which was echoed across the Tory blogosphere. Here's what I posted at The Daily Referendum:

Sorry, that is inaccurate. Lord Forsyth pointed out [in the tax reform paper that he did for George Osborne] two years ago exactly how to fix this issue at minimal overall cost (approx £1 billion per annum or thereabouts static tax loss). The relevant background, from the point of view of the holding company of an international group (with relatively little UK or Irish-source income, e.g. Charter) is as follows:

There are two ways of taxing dividends from overseas subsidiaries;

1. Exempt them entirely (or exempt 90% or 95%, possibly with a disallowance for interest costs if they relate to the investment overseas), which is what most European countries do, or...

2. Tax them at the normal rate, with a credit for underlying overseas tax, which is what the UK and Ireland do. Obviously, there are lots of countries with an effective rate of less than 28% but very few with an effective rate less than 12.5%, so in practice, the Irish-resident holding company of an international group pays little tax in Ireland (its subsidiaries pay the same amount of overseas corporation tax, of course)

Lord Forsyth's solution**** (perfectly sensible and long adopted into the MW manifesto) is to do like most other European countries and just exempt dividends from overseas subsidiaries entirely, this would on the face of it reduce corp tax receipts by £1 bilion (the net corp tax, once reduced by credit for overseas tax) but of course we'd make up most of that in other taxes (like PAYE and so on).

There is absolutely no need to cut UK corporation tax to 12.5%. Ireland got away with it because it is a small country (4 million pop.) so if it loses half the revenue from domestic companies, it can make this back by getting holding companies to relocate there - it is a tax haven.

This scam would not work for the UK because there are simply not enough international holding companies to go round*****. So we'd lose more than we'd gain by halving corporation tax - but the cost of exempting overseas dividends is well worth paying.

Further, if you want to cut taxes on business in the UK, it's VAT and Employer's national insurance (that between them raise three times as much as corporation tax) that are the real killers.

I have explained this before in the context of Shire Pharmaceuticals.

* All this explains why Henderson would expect its overall tax rate to fall to 20%, not all the way down to 12.5%; 20% is presumably the average rate that all its overseas subsidiaries pay.

** A tiresome and irrelevant factoid. I could reply that 28% would be the lowest rate of all G7 countries (assuming the rates haven't changed since I researched this post).

*** I agree that, for a given total level of taxation, dithering is bad and simplicity is good. I am a simplification campaigner if nothing else.

**** Another really good bit in Lord Forsyth's report was scrapping the 10% income tax band and just increasing the personal allowance by £2,000. There was plenty of nonsense though.

***** For example, UK corporation tax receipts approx £40 billion, Irish corporation tax receipts approx £4 billion. If we halved our corporation tax rate we'd 'lose' £20 billion (ignoring Laffer effects, which would be minimal as 28% is not particularly high, historically) and gain, what, £2 billion? Would we be able to get half of all Irish corporation tax payers to relocate to the UK?

"Advertiser WPP may join tax exodus"

Another one bites the dust.

This exodus could be stemmed easily and cheaply, see here for short answer or here for more detailed policies.

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.