The British government on Thursday published the Corporation Tax (Northern Ireland) Bill, which provides for the devolution of tax powers to the Assembly in Belfast and should allow Northern Ireland to set its own rate of corporation tax from April 2017 at a time of expected significant changes in international tax rules that will impact the Republic of Ireland's corporate tax regime.
The current rate paid by businesses in Northern Ireland is 21%, compared to 12.5% in the Republic. If the rate was lowered, around 34,000 businesses in Northern Ireland would stand to benefit, including 26,500 SMEs.
Theresa Villiers, Northern Ireland secretary, said: "In the light of an economy that for many years has been over-dependent on the public sector, allowing the Assembly to set its own rate for corporation tax offers the prospect of a transformative change in Northern Ireland. The Bill is subject to the important conditions contained in the Stormont House Agreement, reached with the NI Executive parties in December after 11 weeks of negotiations. That Agreement involves compromise on all sides, including from the UK and Irish Governments. But it is fair and balanced and provides the opportunity to build a brighter future for Northern Ireland."
The UK Labour party said it was concerned about the rush to introduce the legislation, which it described as “a decision which will have profound implications for Northern Ireland and the rest of the United Kingdom.”
The government hopes that the Bill will become law before the general election next May while it doesn't plan to devolve corporation tax powers to Scotland. However, that could change depending on the outcome of the election.
The Assembly will have the power to set the corporation tax rate over most trading profits in a new Northern Ireland corporation tax regime. It does not include non-trading profits such as income from property.
This will enable Northern Ireland, if the parties agree it is appropriate, to set a different rate of corporation tax from the rest of the UK. Power over the corporation tax base, including reliefs and allowances, will remain with the UK Parliament.
The government said that the regime has been carefully designed to enable the Northern Ireland Executive and Assembly to encourage genuine investment that will create jobs and growth, while minimising opportunities for avoidance and profit-shifting.
The legislation includes a special regime for smaller companies to avoid disproportionate administrative burdens and uses existing international rules for larger companies to avoid unnecessary complexity, while ensuring robust profit allocation.
The Bill also contains rules on the treatment of capital allowances and tax reliefs, including in the creative sector and in research and development, as well as on the treatment of profits and losses in Northern Ireland and the rest of the UK.
NI v RoI
fDi Intelligence, a company owned by the Financial Times which tracks foreign direct investment estimated in 2012 based on a reduction Northern Ireland’s corporate tax rate from the UK rate of 23% to the Republic's rate of 12.5% was expected to create an additional 8,434 FDI jobs over a three year period or 2,811 new jobs per annum based on performance during 2008-10.
Invest Northern Ireland reported almost 11,000 new jobs were added in client firms in the year to March 2014 with 6,040 of these in locally owned companies and 4,760 through externally owned companies. Another 10,800 jobs were added in the subsequent 6 months.
The key sector here are externally owned companies and this week IDA Ireland announced that 15,012 new jobs have been committed by client firms in 2014 and the net figure was 7,131.
If we assume that in NI net jobs after losses was 2,400, the ratio to the Republic is a third.
We plan to return to this story as determining the total employment in exporting externally owned companies is not easy as Invest Northern Ireland could do a better job in presentation and detail of statistics. Even the fDi Intelligence report is also lacking key market data.
The Republic of Ireland remains Northern Ireland's largest manufacturing export market, nearly four times the size of the next largest, the USA, meaning that its health is inextricably linked to NI's overall export performance according to PwC, the accounting firm.
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