Ireland has had low profits tax for more than 30 years. Its economic lift-off began about ten years ago and coincided with the global high-tech boom. Low profits taxes have attracted US companies in research intensive sectors, especially computers and pharmaceuticals. These companies generate their high profits from American or other R&D, but gain greatly if those profits can be declared at production sites in low-tax countries such as Ireland. Tax which should accrue to the US Government, or sometimes the UK Government, goes partly to the companies themselves and partly to Ireland.

Ireland has gained about a quarter of all US inward investment into the EU as result of these tax advantages. The same advantage shared across the 60 million people of the UK would have only one twentieth of the impact as on Ireland’s three million people. Also if the leakage of US taxes was to larger countries, US authorities would have to take some action. The recent US moratorium on offshore taxes earned by American multinationals is perhaps a first step in this direction.

Ireland funded its low taxes for companies by charging high personal taxes and by restricting public expenditure on such things as roads (and, of course, defence). As a poor country it was helped by EU grants for infrastructure.

Incidentally Ireland’s tax advantage also distorts its economic statistics. About 18 per cent of its GDP consists of profits of multinationals, and these do not belong to Irish citizens. As a result its national income is considerably overstated by the conventional per capita GDP measure.

GRAHAM GUDGIN
Regional Forecasts
Belfast

Sir, William Rees-Mogg has added another respected voice to the compelling case for the reduction of corporate tax in the UK. There are other important points to make.

First, the introduction of intra-group debt by foreign parent companies which erodes the tax base by channelling profit out of the country is only really worthwhile where the subsidiary operates in a country with a relatively high corporate tax rate. There is much less incentive to extract profits in this way in lower corporate tax countries such as Ireland, so much so that Ireland places no restriction on the extent to which an Irish company may be leveraged by its foreign owner. Far from this eroding the Irish tax base, multinationals appear to be choosing to maximise their profits there, resulting in an overall increase in Irish corporate tax revenues.

Secondly, we have seen falling corporate tax rates all over Europe, most notably the ten new accession members to the European Union that combine their lower tax rate with a much lower cost base. The corporate tax rate in the UK has remained static since the late 1990s so, unless we act in the face of this intensifying competition, we will be left in a proportionally worse position when looking to attract business investment or retaining the businesses we already have.

KEVIN PHILLIPS
Tax partner, Baker Tilly
London WC1

Sir, William Rees-Mogg is right that a lower rate of corporation tax in the UK is essential. It is not generally realised that if all the special reliefs were eliminated and normal accounting profits were taxed that the rate could be reduced to 23 per cent without any loss of revenue.

Experience in other countries has already shown that significant rate reductions can increase revenue and substantially increase inward investment. Unfortunately British governments are wedded to complex tax structures, but perhaps, following the example of Eastern Europe and Ireland, this may now be about to change.

LORD JACOBS
London NW1

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