Companies move to Ireland to seek more favourable tax regime

In the past few weeks several companies have announced their impending move offshore and have said that this is to escape the UK's comparatively heavy tax burden. So should the Government be doing more to encourage these companies to stay in the UK?

What are companies doing to escape the UK's tax regime?

An increasing number of companies, including Shire and United Business Media, have announced that they are relocating their headquarters to Ireland in order to benefit from a more favourable tax regime.

Notwithstanding the recent reduction in the UK's corporate headline tax rate from 30 to 28 per cent, this still sits 2.5 percentage points above the 25.5 per cent average for the 27 European Union countries. However, this average pales in comparison to countries such as Ireland which has a rate of just 12.5 per cent.

But moving the headquarters operation to Ireland does not affect the tax paid on UK operations - it is more about the amount of tax payable on overseas profits earned by the group. The key issues are the taxation of controlled foreign companies (CFCs) and the UK taxation of foreign dividends, as well as the general level of complexity which UK companies have to cope with.

What is the Government doing?

The Chancellor of the Exchequer, Alistair Darling, announced last week that he was launching a business-Government forum to look at the long-term challenges facing the UK tax system and to ensure competitiveness is at the heart of any future reforms. The group, which will include industry representatives, will discuss ways in which the tax system can provide the long-term certainty multinational companies need, considering the competitiveness and other challenges facing both businesses and Government.

In his speech, Alistair Darling said "Tax is one element of the strong business environment which makes the UK competitive at a global level. The UK corporation tax rate is one of the lowest in the G7."

Also in progress is the Treasury's consultation on the taxation of foreign profits, further details of which are likely to be announced in a few months' time.

What reasons are there for businesses to stay in the UK?

Despite the relatively high corporate tax burden, the UK is still an attractive business environment. The UK is arguably a less bureaucratic place to do business than say France, Germany or Italy and has also avoided the regulatory overload that has left the US with excessive red tape. Indeed the UK has seen the Alternative Investment Market flourish over the past several years. However, it now has the longest tax code in the world, and is beginning to be perceived as a tax environment which is not business-friendly.

Heather Self, International Tax Partner at Grant Thornton says: "It is little wonder that more and more companies are considering Ireland as a holding company location. In addition to the low rate of corporation tax, it has other advantages such as no CFC legislation and no transfer pricing rules.

"Despite the reduction in the headline rate in Ireland, revenue raised from corporation tax receipts in Ireland increased by 60 per cent between 2001 and 2006. Corporation tax is a significant contributor to the UK Exchequer which makes it difficult for the Government to make bold moves. However, relaxing the regime does not necessarily mean that the Exchequer will suffer. In fact it can have the opposite effect, as borne out by the Irish experience."

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