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Tax Stability Key To London's Competitiveness

by Jason Gorringe, Tax-News.com, London

12 May 2009


A new report by a government-industry group has acknowledged that tax policy will play a key role in the future competitiveness of the UK as a global leader in financial services, which is currently under threat as a result of some of the government’s recent tax decisions.

The Financial Services Global Competitiveness Group’s report, published on May 7, identified the maintaining of a “stable, sustainable and competitive tax system” as important factors for ensuring that the UK can continue to provide an attractive location for international financial institutions.

The financial services group was tasked in June 2008 with examining the medium to long-term challenges to London’s continued success in global financial markets. The group has proposed a ten to fifteen year framework for strengthening the UK as a global financial services centre. It is co-chaired by Chancellor Alistair Darling and former Citigroup Chairman Sir Win Bischoff.

“There are several dimensions to the issue of an appropriate tax regime,” the report stated. “These range from discussions on the headline and effective rates, to the importance of certainty and simplicity, to ensuring a broad tax base.”

However, the report stressed that the industry should move away from “a binary discussion on tax rates (‘lower at all costs’).”

“The different aspects of tax competitiveness co-exist alongside other factors affecting the overall business environment in established as well as emerging financial centres – such as regulation, infrastructure and skills,” the report noted. “Taxation as a success factor must therefore be considered alongside other factors to see what the UK can offer to international investors and financial institutions as a package.”

Nevertheless, Bischoff concedes that certain changes to the UK tax system have been destabilizing, citing recent capital gains tax reforms and the controversial new tax regime for non-domiciled residents.

"A series of small adverse developments, or a feeling that clients and business partners are being taken for granted, can lead to a tipping point in which the reputation of even a well-established financial centre can be undermined by changing perceptions of core competitiveness,” Bischoff said.

The City has also expressed disquiet about the new 50% top rate of tax, due to be introduced in 2010, which has led to fears of an exodus of talented finance professionals and entrepreneurs to other countries.

“Competitiveness also requires an ability to attract and retain the most able people, as well as successful firms,” the report observed. “The future levels of personal and business taxes, balanced against other important factors such as how tax revenue is spent or invested, are of course a matter for government; but we acknowledge that they will always be crucial for reinforcing the UK’s competitiveness over the longer term."

The report also noted the work of the Business-Government Forum on Tax and Globalisation, which was set up in April 2008 to discuss ways in which the UK tax system can provide the long-term certainty that multinational companies, including international financial companies, need. But, while recognizing the importance for the UK of "retaining a competitive corporate tax regime among developed countries," the report said that tax rates "will need to vary as a result of fiscal pressures – for example, in response to the current global recession and to maintain the stability of the financial system."

The tax forum has agreed to look at the UK’s approach to international aspects of corporate taxation, in order to develop a system "that further facilitates UK firms doing business internationally while ensuring that the UK’s tax base is protected."

Speaking ahead of the report’s formal launch at the London School of Economics, Darling said that the government will publish proposals for strengthening the regulation of the financial services industry next month.

“Building on that we need to plan for the future,” he declared. “Financial services will always be an important part of our own economy, and not just in London. We will all gain from a strong and competitive financial services sector.”


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