Fiscal Policy Change and Corporate Strategy: Evidence from Northern Ireland

On the 18th November 2016, the devolved assembly at Stormont brokered a ‘Fresh Start’ agreement, with a resolution to the well-publicised welfare reform issue in Northern Ireland (NI).  The published document[1] also paved the way for the devolution of corporation tax power, with the legislation[2]  allow NI to set its own corporation tax levels. From April 2018, the rate will drop to 12.5%.

Academic literature suggests reduction in corporation tax has direct and indirect effects.  Directly, a cut in corporation tax would reduce tax receipts.  Indirectly there are three main effects.  Firstly, there is the cost of profit shifting by GB companies to NI.  Secondly, corporation tax receipts would be boosted by companies relocating their profits to NI. Thirdly, NI based sole traders and partnership could now choose to incorporate and pay lower taxes.  A recent HMRC consultation paper has considered all of these effects and several second-round tax effects due to higher tax earning from greater investment.[3]

Reduction in corporation tax is a competitive strategy to attract inward investment. This means the magnitude of the impact of corporation tax reduction in NI should be considered relative to the rates of GB and ROI.  Recently, to reduce the impact of closure to tax loopholes for international firms, ROI has announced a rate of 6.25% for profits associated with R&D.  Furthermore, the conservative government have aggressive perused a corporation tax reduction policy in GB and has announced a fall to 17% by 2020.  Competition is thus a key part to the impact of corporation tax reduction.

This research project seeks to understand these effects and their strategic implications for NI business community. Using a before and after survey analysis of the business attitudes to the corporation tax reduction, the project seeks to provide new corporate governance and strategy insights to fiscal policy reform.

[1] Northern Ireland Assembly 2015, “A Fresh Start: the Stormont Agreement and Implementation Plan”- http://www.cain.ulster.ac.uk/events/peace/stormont-agreement/Stormont_Agreement_2015-11-17.pdf

[2] Corporation Tax (Northern Ireland) Act 2015 (http://services.parliament.uk/bills/2014- 15/corporationtaxnorthernireland.html)

[3] HM Treasury, Rebalancing the Northern Ireland Economy.(https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/81554/rebalanci ng_the_northern_ireland_economy_consultation.pdf)