Companies in Northern Ireland would be exempt from corporation tax on the first 60 per cent of profits under a private sector plan to be put to the UK government on Wednesday in a bid to stimulate the province’s economy.
The paper is published by the Economic Research Institute, a local think tank, and backed by Sir George Quigley, former chairman of Ulster Bank and head of the Northern Ireland civil service. It represents the most detailed case yet made for special tax treatment for the province, which is emerging from three decades of unrest.
Under the proposal, after the zero-rated first 60 per cent of profits, the remainder would incur tax at the prevailing UK rate of 30 per cent. This would mean businesses based in the province would have a rate of 12 per cent, in effect, just less than that in the Irish Republic.
The issue has become embroiled in the political negotiations on the restoration of the assembly and power sharing executive. Both the Protestant Democratic Unionists and largely Catholic Sinn Féin are calling for lower tax rates. Ian Paisley junior, son of the DUP leader Ian Paisley, says that without a tax deal the DUP will not agree to go into government with Sinn Féin by the deadline of the end of next week.
Businesses in the province currently pay 30 per cent, the rate throughout the UK. But local businesses say a cut would stimulate foreign investment and allow them to compete with the Irish Republic, where the rate is 12.5 per cent.
Gordon Brown, UK finance minister, met political parties last week and outlined various economic measures that would be available to the province if self-government was restored. But he refused to give a commitment on corporate tax.
The UK government has been wary of allowing Northern Ireland to have a different rate, for fear it would trigger demands from other regions.
Economists say such a regime would let UK-based multinationals move headquarters to Belfast and reduce the tax they pay.
Earlier this year, UK tax authorities unsuccessfully challenged the right of Cadbury Schweppes, a UK company, to move its treasury operations to Dublin.
European Union member states set their own tax rates. But economists say Northern Ireland’s proposed corporation tax regime would probably be in breach of European Union rules on state aid, which restricts the amount countries can provide in subsidies to companies in particular regions.
The Azores, Portugal’s Atlantic island territory, is believed to be the only region in the EU to have a special corporate tax rate. Gibraltar has proposed a similar tax reform.
But in July the Commission ruled that the Azores regime was in breach of competition rules.
Northern Ireland raises about £600m a year in corporate tax. If businesses were taxed at 12 per cent, officials say, the tax take would fall to £250m.
Nigel Smyth, economist with the CBI business lobby group, said: “We have to do something radical and it will be a benefit to the Treasury in the long term as tax take increases as more businesses set up. If corporate tax is too difficult, what else can Gordon Brown do?”