The recent decision by Shire plc to relocate its holding company to Ireland
has reignited concerns that UK corporation tax deters companies from locating
in the UK, according to the Institute for Fiscal Studies.
Two papers on this issue, commissioned by the European Tax Policy Forum from
researchers at the Centre for Business Taxation at Oxford University, were published
at a conference of the European Tax Policy Forum and the Institute for Fiscal
Studies on Monday.
The first paper examined the assertion that UK corporation tax deters corporate
headquarters from locating in the country, analysing the reasons why over 200
companies have relocated their corporate headquarters over the last decade,
and arguing that corporate taxes play a significant role.
Commenting on the paper, the IFS observed that:
"Specifically, countries which tax the receipt of dividends received from
foreign subsidiaries (as the UK currently does) are less attractive locations
for headquarters."
"For such countries, the paper shows that the lower the taxes paid by
the foreign subsidiaries, the more tax will be paid on repatriation of profit
to the headquarters, and the greater the incentive to switch headquarter location
to a country which does not tax dividends from foreign subsidiaries."
The Institute continued:
"Around 6% of the sample of headquarters shifted their location in the
last decade. Part of the reason for these shifts was the tax regime in the headquarters
location."
"According to the empirical results, if taxes on foreign subsidiaries
fell by 10 percentage points, that would increase their tax liability for parent
companies resident in countries which taxed repatriated dividends, and induce
a further 2% of headquarters to shift to a more tax-advantaged location."
The second paper released on Monday argued that the UK Government's corporation
tax proposals could damage the UK's competitiveness
This paper provided an economic analysis of the 2007 HM Treasury and HMRC discussion
document, 'Taxation of the Foreign Profits of Companies'.
The IFS explained that:
"It supports one element of the proposal: to exempt the receipt of dividends
from foreign subsidiaries from UK tax."
"But it argues against the anti-avoidance proposals contained in the document
(the proposed 'Controlled Company (CC)' regime). The government proposes to
tax the worldwide 'passive income' (roughly, interest, royalties and dividends)
of any multinational companies headquartered in the UK."
"This goes far beyond the need to protect the UK tax base from profits
being shifted out of the UK, and is likely to create a significant disincentive
to locate headquarters in the UK. If these proposals were implemented, the Shire
example could be the first of many such relocations."
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