Responsive Corporate Tax Cuts to Relieve Both Sides of the Atlantic

August has seen much activity on both sides of the Atlantic with promulgated talks on significant corporate tax cuts. The corporate taxation slashes have been brought forward to help businesses strive in their home countries.

Both the US and UK have initiated corporate tax cut plans in a bid to lower US debt and help UK businesses respectively. A clear assumption can be made that the future of reverting to offshore company formations for tax planning purposes will slowly relinquish should the US and UK adopt such bespoke tax regimes.

The US in particular has experienced extreme detrimental effects from heavy taxation on corporations resulting in a vast and definitive crater in the center of US debt. A large proportion of US companies have taken their operations offshore in a bid to enjoy lower tax rates. Some offshore jurisdictions offer tax rates for companies at 50% less than that in the US and some favorable jurisdictions offer a 0% tax rate. A recent survey with 100 CFO’s in the US, conducted by BDO, found that between 35% to 49% of US technology companies are performing manufacturing or other services offshore.

It is thought that trillions of US dollars are held up in offshore companies which indirectly affect US debt. With more and more US entities registering their businesses offshore, the US economy is slowly feeling the strain of developing and maintaining the country’s financial stability and reducing the deficit.

It has been proposed in recent weeks that a plan of action must be instigated to lure offshore companies back to the US. The tax plan is proposed to be a significant corporation tax cut on all US entities, to as little as 5% for one year. The current US corporate tax rate is 35% which is injuriously high for small, medium and large sized enterprises to contend with.

The US economy has experienced a steady increase in public national debt over the past 50 years, however the previous decade is considered one of America’s worst financial periods. In 2000 the debt ceiling was at US $6 trillion and 10 years later in 2010 the debt ceiling reached an approximate US $14.5 trillion. July 31st 2011 saw Obama’s government agree a further debt ceiling increase and reduction in government spending plans. In addition to this, a new law was passed on 2nd August 2011 by the House, President and Senate for the Budget Control Act of 2011.

It is clear that the general public and the US government are beginning to panic about the state of the financial economy in the US. Although the US has agreed an increase in the debt ceiling, the US will simply continue to borrow money in order to fund the economy – resulting in prolonged debt and reliance on other countries.

One way of securing a large proportion of money back into the US is to attract the thousands of companies off-shoring their profits outside the US to come back. If corporations operate and manage their finances including profits within the US, this will assist in reducing the county’s national debt significantly. The only way for this to be plausible is to dramatically cut corporate taxes in the US. It is reported by the Permanent Subcommittee on Investigations (subcommittee of Homeland Security and Governmental Affairs) that the US Treasury suffers a loss of $100 billion in lost revenue per annum as a direct result of companies off-shoring their gains.

An exclusive interview with an accountant working for an established firm in the Cayman Islands provided an excellent insight into the affects of America’s intentions to lower corporation taxes. He stated,

 “A one year tax cut will have little effect as tax planning is done over a longer period of time and for a one year 5% benefit there will be a lot of admin to move back to the US, especially if it is only temporary.”

He continued,

“There is also the fact there are more benefits of being offshore than purely the tax benefits such as separating transactions from the main part of the business, obtaining international funding, attracting international investors who do not want to be subject to US taxes and regulations.”

On speaking about the offshore tax haven industry over the next few years he replied,

 “We are seeing signs of growth definitely, when I first arrived in the Cayman Islands, there was talk of things picking up, however like everywhere we will be heavily affected by the performance of the world economy.”

With the recent US debt ceiling fiasco, offshore companies in non taxed jurisdictions has been publically and extensively scrutinized. The U.S Treasury takes the burden of these offshore ‘tax havens’ which has subsequently led to the recent Act – Stop Tax Haven Abuse Act – which was introduced a few weeks ago by Sen. Carl Levin, Senator for Michigan.

The Freedom to Invest Act is another Act aimed at curbing offshore abuse by inviting companies to invest their profits back into the US with the advantage of a temporary tax break.

The offshore epidemic is causing a knock on effect in other areas of US economy, namely the employment sector, with June 2011 unemployment rate reported at 9.10 %. With more companies bringing their wealth back into the US it will assist in the creation and expansion of job opportunities throughout America.

But is it any wonder that so many US companies choose to offshore their profits when America has one of the highest corporate tax rates in the developed world. Japan is set to lower their current corporate tax rate leaving the US as one of the most disadvantaged jurisdictions to manage your business finances. Reportedly over 600 US companies have registered offshore in Ireland to take advantage of their 12.5% corporate tax rate system. CEO’s and government bodies in Ireland support their 12.5% tax rate saying it is a ‘vital engine for economic growth’.

The Republic of Ireland’s highly sought after corporation tax rate of 12.5% has sparked plans of cutting the corporation tax in Northern Ireland down to 12.5% to meet its bordering counterpart. It is evident by many that Irelands tax rate makes it a highly favorable location for both domestic and foreign investment and as such, Northern Ireland has highlighted it’s want for a similar economic structure.

David Cameron, leader of the Conservative Party and Prime Minister of UK parliament has cited his initial support of the proposed tax cut in Northern Ireland.

Not only is Northern Ireland voicing plans for a significant corporate tax decrease to match their bordering partner the Republic of Ireland, but now serious talks are being held for Scotland to follow suit. The Scottish National Party leader Alex Salmond has declared his intentions to cut corporation tax independently in Scotland should Northern Ireland get the go ahead to reduce their tax rate.

At present the UK corporate tax rate is 26%, although in 2010 the rate was at 28%. It is reported that the UK corporate tax rate will continue to drop by at least 1% per annum until the rate reaches 23%. Although this is a competitive rate for the UK, compared to other areas of the world and even the Rep. of Ireland, it is not a significant enough tax reduction to attract overseas investors. Ireland has seen rapid economic growth and an increased presence of overseas investment due to their favorable corporate tax rate, thus enticing both Northern Ireland and Scotland to keep in line with this.

Although reducing Scotland and Northern Ireland’s corporate tax to 12.5% will clearly aid growth in their economies respectively, it will simply add to the ongoing struggle of countries like the USA who witness many companies registering their profits offshore to take advantage of such tax systems like Ireland has in place. Therefore, to benefit the UK it may hinder the US plans of bringing profits back to the US. The UK and the US has developed close working partnerships on areas of importance from education to military resources, and so it would be in the USA’s best interest for the UK to maintain their corporate tax rates and not lower them so dramatically.

Not all parties support the SNP’s plans to lower Scotland’s corporate tax rate to mirror the rate of the Irish Republic. It is reported that lowering the tax rate could cause Scotland’s Treasury to loose £1.5 billion in funding.

“The price of oil in the North of Scotland is up and this means that Scotland is in a premium position for cutting its corporate tax rate”.

Alex Salmond’s plans for Scotland to decide its own corporation tax independent from the rest of the UK will be welcomed by many Scottish business owners and supporters of the SNP who want to see Scotland set its own rules independent from the UK parliament.

The main causes for concern if Scotland lowers its corporate tax rate, is the loss in the Treasury’s budget. Scotland’s Treasury helps fund major areas of importance such as hospitals, schools and prisons. If lowering the tax will have a detrimental effect on sectors such as education and health it would be a clear assumption that the go ahead by David Cameron for independent Scottish corporate tax will be denied.

Speaking to experienced economist and economics University lecturer Niven Mackay on the matter of Scotland’s proposal for a tax decrease he said,

“The price of oil in the North of Scotland is up and this means that Scotland is in a premium position for cutting its corporate tax rate”.

He continued,

“Scotland has become a very rich country and by lowering the corporate tax both the Scottish companies and Scottish government w ill do very well out of it”

On citing the problems Scotland has faced in terms of high taxation he declared,

“The ongoing problem is that companies are afraid to set up business in England and Wales due to their high tax rates so keeping Scotland’s corporate tax independent will help Scotland’s economy immensely”.

Speaking of his market predictions should the corporate tax fall in Scotland, Mr. Mackay added –

“To an extent we will see employment opportunities increase with new businesses having the confidence to start up in Scotland more than ever before…”

Although the widespread predictions that the Scottish and Northern Irish economies will develop employment opportunities and investment benefits this advantage has not been wholly backed by influential Parliamentary figures. However it is clear the corporate tax cut will help business start ups and attract overseas investment, and considering the state of the UK’s economy, employment opportunities should be at the forefront of the government’s agenda.

The Scottish National Party has spoken of a North Sea Oil trust fund which will provide Scotland with an additional £4.3bn per year in order to fund the party’s goal for Scotland corporate tax cuts.

Speaking to Mr John Hector Mackenzie, MD for Rotech – a global corporation providing fabrication services and primary and secondary structures for the oil industry – he gave his opinion on the corporate tax cuts and the North Sea oil trust fund. Head quartered in Aberdeen – home to the North Sea oil companies, the proposed corporate tax cut and oil trust fund will have a direct affect on his organization.

Speaking on the corporate tax cuts in Scotland, he said,

“The corporate tax cut in Scotland would be very welcome to stimulate business expansion”.

Mr Mackenzie’s comments on the North Sea oil trust fund was as follows,

“Another tax on the North Sea oil industry would have a negative impact on the North Sea development, when oil companies can spend their money elsewhere in the world with a more favorable fiscal regime.”

Speaking on how the Oil trust fund and reduced Scotland corporate tax would affect his company, Mr Mackenzie stated,

“The oil fund will make it much harder for us to find work in a reduced construction market”, however “the corporate tax reduction would allow us to invest in expansion if the corporate tax cut was funded from another source”

If the SNP get the support form David Cameron to cut taxes, the party claims that it will abolish business rates completely for these small businesses or a ratable value of £8,000 (currently 120,000 businesses), with an additionally significant tax cut for businesses over the previously mentioned ratable value.

An industry perspective of the corporate tax plans in both the UK and US demonstrate a direct clash in prospective results. To clarify, although the US intends to lower corporate tax rates to help attract companies back to the US, the intended tax breaks initiated in both Northern Ireland and Scotland could assist in preventing companies being attracted back to the US. Instead more US and other foreign companies may seek incorporation in favorable locations such as Ireland (12.5% corporate tax rate) and soon to be Northern Ireland and Scotland.

Although the corporate tax cuts in the US may initially stimulate a level of attraction for US companies to return to the US from offshore jurisdictions, it will not have a long term beneficial effect on the economy and the offshore industry looks set to continue in significance. The UK corporate taxation slashes will be a welcomed proposal in both Northern Ireland and Scotland and would stimulate greater investment and business set ups in the respective countries. However funding the corporate tax cuts in Scotland with a North Sea oil trust fund could cause disruption to the oil industry.

Decisions regarding the corporate tax cuts for Northern Ireland are expected in autumn this year while Scotland’s corporate tax slashes are still in the early stages of negotiation.

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