UK Tax Competitiveness
Business-Government Forum on Tax and Globalisation 9th June 2008
Outline and objectives
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Our view of tax competitiveness Objectives of of business tax system Objectives UK business tax system Trade-offs in business tax policy What do we mean by ‘competitiveness’ UK’s approach to tax competitiveness How competitive is the UK? Previous engagement with business on competitiveness and the Government's response Questions for discussion and where we go from here
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Our view of tax competitiveness
‘Getting business tax right is not easy. We recognise that the need to fund
public services from which you benefit, must be weighed against the need to maintain competitiveness. We need to get the balance right. I also have to ensure that tax rates encourage investment by providing incentives to innovate and encourage growth. We listen carefully to what you have to say, and we will consult on significant changes which will affect your future competitiveness’ (Speech by Chancellor of Exchequer to CBI, 20 May 2008)
Considerations include:
Minimising distortions Compliance costs as low as possible Stability and certainty Low rate and broad base UK as an attractive location for investment UK-based companies can compete effectively at home and abroad
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UK high-level tax and business tax objectives
UK High-level Tax objectives
• Raising sufficient revenue
for public goods and infrastructure
• Fairness
• Supporting the
• Other
Meeting the fiscal rules Ensuring that the tax yield is sustainable and risks managed
Government’s growth and productivity objectives
economic, environmental and social objectives
• Ensuring individual
UK business Tax objectives
businesses pay their fair share of tax in relation to their commercial profits
• Maintaining business competitiveness: Maintaining competitive corporation tax rate Ensuring UK is an attractive location for inward investment Enhancing the ability for UK companies to compete abroad
• Supporting investment and innovation
Competitive CT rate, appropriate capital allowances and R&D credit regime
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Examples of trade-offs in business tax
• • • •
Avoiding prolonged uncertainty vs. effective consultation (foreign profits) Fairness vs. simplicity (taxation of company cars) Raising revenue to fund public services vs. maintaining low tax rates (corporation tax) Environmental considerations - discouraging environmentally damaging activities vs. imposing burdens on business (fuel duty/VED)
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UK’s approach to tax competitiveness
UK seeks to achieve appropriate balance between objectives and trade-offs identified earlier • Some countries have a very low rate of corporate tax without offshore avoidance rules:
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attempt to attract mobile investment, including diverted profits jurisdictions offering very low CT rates have generally had a small corporate tax base in the past, so minimising revenue costs
• The UK does not wish to compete with these territories on
corporation tax rates as doing so:
would necessitate an increase in the UK’s personal tax take or other taxes could lead to a ‘race to the bottom’ ignores other tax and non-tax factors where UK compares favourably
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Outcome of previous engagement with business
Areas of concern raised in meetings with business in recent years
Government response to business concerns
Headline CT rate
Taxation regime for dividends
reduction to 28% announced in Budget 07
June 07 discussion document on reform of foreign profits taxation and ongoing consultation with business implementation of Varney Review recommendations
CFC rules
Compliance costs and relationship between large business and HMRC
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Questions for discussion
• Are the issues identified earlier still the right ones?
• How do you think the tax system can be used to
support business growth while maintaining yield? • How would you like to see the UK tax system develop over the longer term? • What steps would take us in that direction? • How do you see trade-offs identified fitting into this?
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Background
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International comparisons – CT rates
Corporate tax rates (2008)
45% 40% 35% 30%
Top CT Rate (including local taxes)
55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 1983 1986 1989 1992 1995 1998 2001 2004 2007 EU15 Average NMS average G7 Average UK
CT rate
25% 20% 15% 10% 5% 0%
Ire l A an D u st d e n ri m a N G ar k et r e he e r la ce Fi nds Po nl an rt d Sw ugu ed l e G Un e Lu r m K x'b an ou y Sp rg ai n Ita Be l lg y Fr iu m a C n ce an ad Ua S Jap A an
Source: OECD
10
% of GDP
0
1
2
3
4
5
Source: OECD
CT receipts as % of GDP (2005) 6
11
Lux'bourg Czech Japan Spain Denmark N'lands Sweden Belgium Canada Ireland UK Finland US Portugal France Greece Italy Slovakia Austria Hungary Poland Germany OECD EU19 G7
% of total revenue
10
12
14
16
0
2
4
6
8
International comparisons – CT burdens
Source: OECD
CT revenue as a share of total revenue (2005)
Lu xe m bo u U C Jap r g ni ze a te ch n d R St Ireate . la s Sp nd C a N Gana i n et r da he ee r la ce nd Po U s Sl rtu K ov ga Be ak Rl lg . i D Fi nl u m e n an Swm ard ed k en Fr Ital y Poan c e A la G u s nd O e E C r m tri a an D G Av y 7 er Av ag er e E Uage 19
Rate (%)
10
20
30
40
50
60
0
Source: OECD
12
Top personal income tax rate (2007)
Sweden Denmark N'lands Finland Belgium Austria Germany Spain Italy Portugal Slovenia Ireland France UK Poland Greece Lux'bourg Hungary Malta Czech Rep Cyprus Bulgaria EU15 average EU27 average Japan USA Canada
C
% of GDP
10
12
14
0
2
4
6
8
International comparisons - CT+Employers SSCs and income tax
Source: OECD
CT+Employers Social Security Contributions (2005) 16
ze ch Sw Re e p Fr den. a Spnce Fi a Benlanin lgi d H Itum Lu un al x' ga y Slo Poboury va rtu rg k g AuRe al s p. N Ge Ja tria et r pa he m n r an G landy re s ec Ue C UK an S D Irel ada en an m d O ar EC D E k G A U 7 ve 19 Av ra er ge ag e
Other positive aspects of the UK tax system
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No withholding tax on dividends Large international tax treaty network covering over 100 countries Open and responsive tax system Tax following accounts R&D tax credits Generous interest deductibility Small companies rate covering substantial profit band
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Comparison with other tax regimes
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Non-tax aspects of competitiveness play a significant role
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•
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Macroeconomic stability Labour, capital and product market flexibility Access to business services Other factors:
sectoral hubs English language, legal system etc.
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International survey evidence
United States Hong Kong, China Denmark United Kingdom Canada Ireland Japan Finland Sweden Belgium Germany Netherlands Austria France EU25 Spain Luxembourg Italy 0 10 'Ease of doing business' World Bank 2008 ranking (total of 178 countries)
20
30
40
50
60
World Bank Rank
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Other survey evidence confirms UK as a competitive place to do business
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UK ranked world’s 9th most competitive economy (Word Economic Forum, Sept 2007) UK ranked first in terms of ease of doing business from a VAT perspective (KPMG’s 2008 worldwide survey on 'VAT friendliness‘) London ranked first as centre of commerce in the world economy (2007 report commissioned by MasterCard on the top 50 centres of commerce; New York in 2nd place, Tokyo 3rd and Chicago 4th).
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Rankings of competitiveness indicators
Rankings of various competitiveness indicators World Bank Doing Business (2007) 1st UK in G7 Singapore 2 World Economic Forum (2007) USA 4 UNCTAD Inward FDI (2007) USA 2 OECD Product Market Regulation (2007) UK 1
UK (overall) Germany France Italy USA Canada Japan
6 20 31 53 3 7 12
9 5 18 46 1 13 8
2 8 3 9 1 6 -
1 13 22 26 3 8 10
18
UK top performer in Europe for FDI
Market share of FDI projects (%)
25 20 15 10 5 0 2006 2005
Source: Ernst and Young (2007)
19
UK as a location for HQs
Number of headquarters* by country (2005 ) 1200 1000 800
No. of HQs
Multinational HQ relocations (1997-2007) 80 70 60 50 40 30 20 Total relocating from… Total relocating to…
600 400 200 0
US UK Japan Sweden France Germany Italy Belgium N'lands Denmark Spain Switz'land Canada Finland Norway Ireland Australia Bermuda Austria India Singapore Israel S. Africa Hong Lux'bourg
10 0
Norway Germany Belgium Italy Canada S'land Austria Finland Ireland Lux'bourg Australia Sweden Denmark N'lands France Spain Japan UK US
Source: Voget (2008). *firms with at least one foreign subsidiary registered in the ORBIS database
Source: Voget (2008). Relocations relate to cross-border takeovers
20
Growth in CT receipts reflects growth in profitability
4.5 16 15 13 12 3 2.5 2 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 11 10 9 8 14
Receipts as % of GDP
4 3.5
CT receipts (lhs)
Source: ONS, HMRC
Rate of return of Private non-financial companies (rhs)
21
% rate of return