Following its vote to leave the European Union (EU), its vote also known as “Brexit,” the United Kingdom (UK) has been searching for ways to attract new businesses. One proposal that has gained traction in the government is the idea of becoming a new tax haven for foreign corporations by slashing corporate taxes. The Organization for Economic Cooperation and Development (OECD), however, has put in its opinion on the matter, and it says such an act is unlikely to entice foreign investment.
In a memo dated June 24, Pascal Saint-Amans, head of the OECD said, "The negative impact of Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer. A further step in that direction would really turn the UK into a tax haven type of economy.” He went on to note that if the UK seeks to attract business, it would need to cut its tax rate much further or institute tax rules he described as “generous.”
To that end, UK Chancellor George Osborne said on Friday that he wants to lower corporate tax rates to less than 15%. Currently they are at 20%. In his words, such an act would show that the post-Brexit UK is “open for business.” He continued: “We must focus on the horizon and the journey ahead and make the most of the hand we’ve been dealt.” He also said that he wants to build a “super competitive economy,” and that he believes a low business tax and global perspective would achieve that aim.
The OECD’s Saint-Amans, on the other hand, doubts that this would be an effective approach. He noted that significant political obstacles would stand in Osborne’s way, and that the lost revenues from these taxes may be more than the UK’s post-Brexit economy can afford.
Most OECD nations have a corporate tax rate of 25%, on average. The UK is already in the process of reducing its corporate tax rate to just 17%. The UK’s neighbor, Ireland, has established itself as a corporate tax haven by reducing its rates to an even lower 12.5%. With such a remarkably competitive rate so nearby, the OECD doubts that the UK’s proposals will really act as any significant enticement for foreign businesses.
In another effort to entice businesses, the UK also created a tax break for companies on certain types of income and allowed companies to avoid taxes all together for earnings derived from tax haven subsidiaries. The UK also seems to be contemplating (at the OECD’s urging) the possibility of offering better rates (or no tax at all) for value added tax (VAT) items now that the nation is no longer required to collect same under EU laws.
Unlike the UK, most tax haven nations tend to be small economies seeking to get a seat at the table by offering low tax rates. These low rates entice businesses, and ultimately increase revenues for the tax haven nation. The UK, on the other hand, is a large and important economy and unlikely to gain much revenue through these tax haven tactics and could possibly even lose money.