I congratulate the right hon. Member for North Shropshire (Mr Paterson) and the Secretary of State on getting this proposal into the starting gate and add the support of the Liberal Democrats to getting it to the finishing post.
I recognise that I am no expert on Northern Ireland. In fact, I think this is the first time that I have stood up in the House to speak on Northern Ireland issues, and I ought therefore to pay tribute to one of my illustrious predecessors as Member for Redcar, Mo Mowlam, who of course played an important role in the progress towards peace in Northern Ireland.
The hon. Member for Foyle (Mark Durkan) in his extensive speech talked a lot about the detail that needs to be worked out. We recognise that that is the case, and
there may be some devils in that detail. This could turn out to be quite complex when we come to look at the interactions of this proposal with all the various existing proposals. We all know that tax competition works between countries, and it is particularly evident where there is a hard border. I vividly remember the Belgium-Luxembourg border when I lived over there, where there were about 20 garages all on one side of the road due to the difference in petrol taxes. The hon. Member for South Down (Ms Ritchie) again raised today the question of VAT tourism, and I pay tribute to her for her campaign, particularly as I also represent a coastal community and would very much like to see the same move.
The Republic of Ireland has a headline corporation tax rate of 12.5% and that is what we are mainly addressing here today. However, it is not the 12.5% that gets all the US technical companies to register in Dublin and that gets Marks and Spencer doing its mail order through Dublin; instead, it is some very special arrangements in Ireland, and I certainly would not want to see future pressure to align Northern Ireland with those arrangements. I believe the Ministers should be addressing some of those arrangements in Dublin rather than opening any doors towards further alignment with what happens in Ireland, because I think we all recognise that some of those arrangements are deeply damaging to the UK as a whole.
I noted that Northern Ireland Members rightly referred in their speeches to the unemployment rate and the economic situation in Northern Ireland and the reliance on foreign direct investment. I very much identify with that as an MP from the north-east of England. In unemployment and other such criteria, in all the tables where Northern Ireland is top—or bottom, if we want to look at it that way—the north-east of England tends to be the next region. My constituency is 31st out of 650 for unemployment and my biggest private sector employers are Saudi Arabian, Korean, Thai, Indian and Singaporean, so I know what foreign direct investment means and how important it is to areas like mine.
Therefore, I have a question for Ministers. I recognise that foreign direct investment is not a zero-sum game but there is an element of that. If a company is choosing where to go, it only makes one decision. What assessment have Ministers made of the effect on the rest of the UK of encouraging more foreign direct investment into Northern Ireland? I am not saying I disagree with this measure, but I think it is important to note that in some cases it will switch investment from other parts of the UK. Indeed, as the hon. Member for Foyle said, because of the different corporation tax rate the rest of the UK will, in effect, become a foreign country and Northern Ireland may attract investment from UK companies that otherwise would have gone elsewhere in the UK. That is an important thing to remember and to consider.
I am also concerned about potential further devolution of corporation tax and, ultimately, a race to the bottom, as the hon. Member for Foyle said. I am particularly concerned about the situation in respect of Scotland and the north-east of England, which of course borders Scotland. The logic of this measure—that we have to move towards aligning corporation tax rates in Northern Ireland with those in southern Ireland because those countries share a border—suggests that we should not allow Scotland or Wales to deviate from the corporation
tax rate on this large island that we inhabit. It would be argued in this place that we need to align the English rate with the Scottish and Welsh rate. I very much support what the hon. Member for Foyle said—that that may be a path we want to go down, but let us do so knowingly, at least. A different rate in Scotland could be very damaging to the north-east, which, I repeat, is England’s poorest region.
It has rightly been pointed out that corporation tax rates are not the only consideration. According to an Ernst and Young study, corporation tax comes only sixth on the list of things that foreign direct investors look for. However, it is very important to half of them and has some importance to most of the rest, so it is not unimportant—it is just not the most important thing.
I am sure the Minister is expecting me to talk about avoidance possibilities, given that I often do in such debates. I note that the Government have included various measures in the Bill to exclude activities such as investing, and trades such as lending and property, and the Bill does not give the Northern Ireland Executive power over reliefs and allowances. However, once we get into the detail, we may find that if the rate goes down to 12.5%, the way some of the reliefs and allowances in the UK are drawn means that they will interact strangely. HMRC needs to check all that out as part of the process.
It is always worth applying a bit of game theory when looking at new taxes, tax reliefs or changes in taxes, because if it is possible to imagine a tax avoidance scenario, it will probably happen. Does the Minister recognise that the Bill puts a new transfer pricing interface in place? At the moment, when corporations transfer goods backwards and forwards to Northern Ireland, there is no corporation tax difference, so there is no incentive to do anything strange with transfer prices. This arrangement will give an incentive to shade transfer prices in a particular direction. Does the Minister agree, and what resource will he put in place to deal with that? According to a Public Accounts Committee hearing that I participated in, HMRC has less resource on transfer pricing than each of the big four accountancy companies, so it is not an area in which we are currently heavily staffed.
Of course, transfer pricing is not just about products; it is also about royalties and management fees, and I imagine that if a bank has a back office in Northern Ireland, it will become a highly profitable operation under these new arrangements, because there will be an incentive for the management fees to be as high as possible.
Can the Minister confirm that corporate financing operations will not qualify for the lower rate, which might allow profit shifting of the sort we see to Luxembourg and other countries? Will he confirm that such operations cannot be concealed within a genuine trading operation? Here I am thinking of the regular movements of capital and interest within a manufacturing company, for example. Can he confirm that there will be no hidden financing and profit-shifting operations through interest payments and similar means?
The Bill is designed to encourage foreign direct investment, but in effect, the rest of the UK also becomes foreign from a corporation tax point of view. What assessment has the Minister made of the moves that might happen from the rest of the UK and the loss of
tax that they might incur? The expression “brass plate” has been used many times today. I believe that the Bill is written in such a way that that will not happen, but I hope the Minister will confirm that.
The legislation will be tightly drawn, but I ask that the Minister resist any further calls from the Northern Ireland Executive to compete with Dublin on special arrangements or to get power over reliefs, which would create new complexity within the UK tax system.
I do not think it right to say that the cost of these measures will be the entire difference in the tax rate on the tax base of Northern Ireland. If that were true, there would be no point in doing this. The whole point is that these measures will encourage economic activity in Northern Ireland, so there should be quite a payback of tax; otherwise, why do it? What assessment has been made of that?
Can the Minister say a bit more about the constraints that the UK Government are putting in place on the overall cost of these measures? What constraints, if any, are there on the rate that the Northern Ireland Executive could choose? Would zero be allowable? I should be interested to hear the Minister’s answer.
I am conscious that other Members, particularly from Northern Ireland, wish to speak. I look forward to hearing the Minister’s response.
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