Fight is on to give Holyrood power over corporation tax

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by George Kerevan

FIRST Minister Alex Salmond has said it would be unacceptable for the Coalition government to deny Holyrood the ability to determine corporation tax – the main taxation on company profits – after the overwhelming mandate granted to the SNP on 5 May.

In a first post-election meeting with Michael Moore, the Lib Dem Secretary of State for Scotland, Mr Salmond argued that transferring powers over corporation tax to the Scottish Parliament had been clearly indicated in the SNP’s manifesto document, and that it was now the “overwhelming view in Scottish society, even beyond the ranks of the SNP.”

The First Minister wants the power to set corporation tax – vital to attract foreign investment – included in the new Scotland Bill that is now going through Westminster.

The Coalition government is already conducting a consultation in Northern Ireland, with a view to handing the Stormont Assembly local control over corporation tax. The Northern Ireland Secretary of State, Owen Paterson, has already come out in favour of the move.

However, in Scotland, despite the drubbing received by the Lib Dems on 5 May, Michael Moore is still opposing giving similar fiscal powers to Holyrood. Moore claims that Northern Ireland is a “special case” and cited opposition to transferring corporation tax in the recent, pro-Unionist Calman Commission report on extra powers for Holyrood.   

The Calman argument against devolving corporation tax is that giving Holyrood the right to vary business taxes would lead to Scotland poaching investment from England. International experience shows such fears are unfounded.

Regional business tax competition within a single nation state is actually common in the other industrial economies. In Canada, for instance, the various provinces and territories levy their own business tax in addition to the federal rate. Last year, the provincial rate for larger companies varied between 11.5 per cent in the North West Territories and 16 per cent in Nova Scotia.

Tax competition has not harmed the Canadian economy. Quite the reverse. KPMG, the accounting firm, recently declared that Canada leads the developed nations as a place to locate businesses.  In the fourth quarter of 2010, Canada was growing at 3.3 per cent – thanks, in part, to Canadian provinces being able to attract foreign investment through preferential tax rates.
In Northern Ireland, the UK Treasury’s own consultation document claims that cutting corporation tax in the province to match the 12.5 per cent rate of the Irish Republic would boost domestic investment by as much as £65 million in the first year, and by £110 million per annum within a decade. It also estimates that foreign investment would increase by up to £200 million in the first year, and by £310 million per annum after ten years.

However, in return for devolving corporation tax to Stormont, the UK Treasury wants to cut the Northern Ireland block grant (in phases) by £300 million. Even so, the net impact on spending in Northern Ireland will be positive. Any short-term reduction in public spending would be balanced through enhanced economic growth and an eventual increase in other tax receipts.

Northern Ireland is not the only part of the UK wanting devolution of corporation tax. In Wales, the Holtham Commission has recommended that the Welsh Assembly open discussions with the UK Government on the feasibility of a separate rate. Only the Calman Commission has opposed devolving business taxes, on the dubious grounds it would “distort competition” within the UK.

The true argument for giving Northern Ireland, Scotland, Wales (and even the North of England) devolved control over business taxation is that local economies within the UK vary tremendously, and so require tax regimes tailored to their needs. Cutting corporation tax in order to poach another area’s existing firms would not work anyway, as these companies are generally specific to local market conditions.

If Scotland wants to build offshore windfarms, we will have to attract huge capital investment from abroad. But inward investment to Western economies fell by over 40 per cent in 2009 and is unlikely to recover. The only way for Scotland to attract sufficient foreign funds for infrastructure development is through controlling local corporation tax.