Ireland And The Netherlands Lead The Way In Tax Competitiveness

by Robert Lee, Tax-News.com, London

15 March 2006

Despite repeated complaints from industry over the growing UK tax and red tape burden, a recent survey has found that the UK remains significantly more competitive than France, Germany, Belgium or Spain. However, it has a long way to go before reaching the levels of tax competitiveness achieved by Ireland and the Netherlands.

A survey of senior tax executives in 50 large UK-based companies, including representatives from the FTSE 100, FTSE 250 and large subsidiaries of foreign parent companies, carried out by KPMG, the professional services firms in January and February this year, found that 54% placed Ireland in the top three countries for tax competitiveness, with 50% choosing the Netherlands.

Luxembourg attracted the vote of 32% of the respondents, while the UK polled 14%. Belgium and Spain both scored 4% while France and Germany received no votes.

The majority (two-thirds) of the respondents expressed the view that taxation was a consideration when deciding where to locate operations, and over 70% said that tax issues have become more important for international business planning over the past two years.

However, it is the clarity and simplicity of a country's tax system, rather than its tax rates, which appears to be the deciding factor for multinational firms. Only 68% of companies looked for low tax rates, compared with 88% which looked for clarity of interpretation of tax legislation and 84% which looked for consistency in tax-related judgements.

This is evidenced by the fact that corporate tax rates in both the Netherlands and in Luxembourg are (marginally) higher than in the UK, at 31.5% and 30.4% respectively. However, both countries are considered to benefit from a more stable and predictable tax regime than companies experience in the UK.

Meanwhile, Ireland combines a tax system famed for its simplicity with a corporate tax rate of only 12.5%.

Nevertheless, despite the UK's competitive advantage over some of its major European competitors, company executives warn that recent changes to tax law have eroded this competitiveness; seven out of ten said that recent changes in the UK’s tax regime have made the UK less competitive than in previous years.

Furthermore, over 80% criticised HM Revenue & Custom’s lack of detailed consultation before implementing rule changes, and a similar number said that tax law changes too often. Only 6% said that HMRC’s anti avoidance campaign had made them reduce the amount of tax planning they do.

“Major UK businesses are unlikely to leave the country in large numbers,” noted KPMG’s Chairman of UK Tax Malcolm Edge, “but it’s clear from our survey that they are more and more frustrated by the complexity of the UK tax system."

Mr Edge added that: "Far from discouraging tax planning, the huge range of anti-avoidance measures is forcing companies to be more sophisticated in the planning they do, to fulfil their duty to shareholders."

The survey also revealed the increasing importance of European legislation in settling tax disputes. Two thirds of the companies contacted had gone to the European Court of Justice with a claim against the UK authorities, most often because they felt they had a duty to shareholders to do so.

The majority of respondents also expressed support for greater harmonisation of the methods of calculating the corporate tax base across Europe, although only 30% were in favour of harmonised tax rates.

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