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UK To Lead Europe For Inward Investment Despite Tax Concerns

by Robert Lee, Tax-News.com, London

19 June 2008


Despite growing criticism from multinationals over its corporate tax burden, the UK is the most popular European inward investment destination for corporates, and will trail behind only the US and China for inward investment in the next year, according to a new report by tax and advisory services firm KPMG.

In a global survey of corporate investment plans carried out by KPMG International, corporate investment strategists from over 300 of the largest multinational companies in 15 major economies were asked where they plan to invest in the next 12 months and in five years’ time.

According to KPMG, the results "look very positive for the UK" with an outlook of stability and continued growth. The UK lies third in the table for investment this year, behind only the US and China, with 14% of respondents planning to invest.

Looking ahead to 2013/14, the UK is predicted to increase its share of investment by 3 points to 17%, although by then it falls down the table to fifth place after being overtaken by Russia and India, but maintains its strong position ahead of the rest of the world.

By 2013/14, most respondents thought that the credit crunch would no longer be having an effect on their investment plans. Six out of ten respondents felt that it would affect investment for the next two or three years but not longer, with just 18% suggesting that it was “a major problem for the foreseeable future".

The research also examined corporates’ global investment plans in specific sectors - in financial services, the outlook is even more positive for the UK. It is second only to the US now, and equal first with the US in 5 years.

In IT and telecoms, the UK sits alongside Germany and the US for investment for this year, but Germany again gives way to China, India and Russia 5 years from now. In the property and transport sector, the UK leads for investment both now and in five years.

Speaking at KPMG’s 2008 EMEA Tax Summit in Barcelona, where the survey was launched, Sue Bonney, Head of Tax for KPMG’s EMEA region and a partner in the UK firm noted that: “It is striking that at a time when there is little good news on the economic front, our survey paints such a positive picture for the UK.”

The survey also examined the reasons behind a corporate decisions to invest in a particular territory. Asked what are the main attributes they look for in a country before investing, the most popular was access to new customers, closely followed by political stability and other factors.

Sue Bonney added: “Clearly the commercial imperative of reaching new markets takes priority in corporates’ investment decisions and that is the driving reason behind the strong performance of the BRIC nations."

"For countries such as the UK and other European nations that cannot offer such dynamic customer growth opportunities, due to their mature markets or declining populations, it is interesting to see that factors such as the general stability and fairness of the regulatory and political environment are ranked so highly. And within that it is interesting to note that tax policy is a significant factor – ranked above quality and cost of labour and the transport system.”

According to KPMG, the survey’s results suggest that improving the UK tax system could reap particularly strong benefits. Sue Bonney explained that: “Even though the debate over the UK’s relatively low attractiveness to business from a tax perspective is raging and some companies have announced their intentions to leave the country because of our tax system, Britain still ranks extremely highly as an inward investment destination."

"But investing into operations here is very different from establishing a headquarters in the UK. If we could manage to make this country as attractive a location for a head office as it appears to be for inward investment we could potentially win on both fronts.”

Looking at UK corporates investing overseas, for this year, British investors are interested in the US (30%), China, (25%) and Germany (20%). Looking ahead, China stays at 25%, the US and Germany are attractive for 20%, and Russia looks promising for 15%.

Virtually all of the UK’s investments will be additions to existing projects in these countries, with the exception of a relatively small but growing number of investments in European countries.

Sue Bonney concluded:

“Overall the shift in influence that these strategists expect towards the BRIC economies looks like the beginnings of a fundamental change in the balance of economic power."

“Our survey shows that corporate investors are already planning their responses to such a shift that has been happening for some time. The results help confirm the rise of the BRIC economies as viable alternative places to invest, taking funds primarily from the US economy."

"The continued strength of the European economies may come as a surprise to some, but the fact that they hold up so well suggests that we may be developing a roughly equal balance of economic power between the Americas, Europe and Asia Pacific. That would indeed herald the start of an entirely new global economic game.”

A comprehensive report in our Intelligence Report series looking at offshore and onshore corporate structures and their tax implications is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report7.asp

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