Corporation tax article

As the consultation period on HM Treasury proposals draws to a close, there has been considerable debate and discussion on the merits of Northern Ireland being granted the power to set its own rate of Corporation Tax.

Most of the commentary has been supportive of the proposal as a long term mechanism to reduce our historical overdependence on the public sector, grow our private sector and stimulate theinvestments which will create more, and better paid, jobs.

Initial analysis, based on broad high level assumptions, indicates that a lower rate of corporation tax could potentially attract around £1 billion of extra investment and 3,200 additional jobs per annum. These would be additional to the jobs that Invest NI already attracts from foreign direct investment, which averaged 2,500 annually over the last three years. So, in total, that could equate to an additional 64,000 jobs over 20 years.

Of course, we recognise that it is very difficult to accurately forecast over that time frame in any market, but particularly in a global one, where a single action or decision by a foreign country has the potential to seriously impact on our regional economy. However, we are operating on a long term basis. Given the size of the challenge we face, it is generally accepted that it may take 20—25 years to fully address.

Invest NI firmly believes that a step change is required and that lowering the corporate tax rate presents a new approach and a clear opportunity to increase the private sector in Northern Ireland. In addition, if the Northern Ireland Executive were given wider tax varying powers, then there are a number of other complementary initiatives that could be considered, including R&D tax credits, enhanced capital allowances and training credits that could be used as an incentive to encourage further investment.

Our current value proposition is largely based on competitive costs and these have proven attractive in attracting certain types of investments, as our recent track record shows. Over the last three years we have attracted over 7,500 new jobs from inward investment, and the quality of jobs has increased. Last year, through investments by such global names as Allen & Overy, Dow Chemical and Heritage, over 81% of the new jobs we attracted to Northern Ireland paid higher salaries than the private sector median.

That continued the positive trend of recent years, but the fact remains that we still lag some way behind our nearest neighbor in securing the absolutely highest quality investments. The Republic of Ireland has used its 12.5% headline rate of corporation tax to become one of the most successful global regions for attracting foreign investment, especially for more profit-focused investments where tax is a key influence.

If we were to also acquire that ability, there is no doubt that it would add value to our overall sales proposition and allow us to fish in a completely new pool for new inward investments. But it would take several years before we truly start to see the benefits accrue.

It is therefore vital that we continue to use all of the other weapons in our armoury to drive forward economic growth.

Key to this will be building on the positive momentum of the past few years to encourage more companies to embrace and apply innovation, supporting them to grow to scale and helping them to increase our export base.

Our economic future will be heavily reliant on our businesses developing the competitive edge which differentiates them sufficiently to sell their products and services in international markets, along with continuing to attract inward investment. Through both these measures we can support the creation of sustainable, well paid jobs for our workforce.

However, jobs alone will not enable the step change in our economic performance. As Bro McFerran, Managing Director of Allstate NI, one of our most successful inward investors, recently said, “we need hired heads, not hired hands in our workforce.”

The skills of the workforce make a major contribution to productivity and economic success. Indeed, a recent McKinsey report identified that, rated on a scale of one to five, a one point improvement in leadership and management practices would have the equivalent effect to that produced by a 25% increase in labour or a 65% increase in capital.

So it is appropriate that we invest in this vital area to ensure that our local business base has the technical capability to drive forward the productivity improvements that will give them a competitive edge in export markets and the commercial capability to convert market opportunities into firm orders.

If the devolution of Corporation Tax enables us to target new high value-added opportunities which introduce completely new functions into our economy, it will be imperative that, collectively, we ensure that the necessary investment in skills is made to guarantee delivery of appropriately qualified people to inward investors.

A reduced level of Corporation Tax, along with our continued focus on growing our local business base through innovation and exports, would give Northern Ireland a truly unique proposition through which to rebalance and rebuild our economy.

This article appeared in Business First magazine, June 2011 edition.