George Osborne's corporation tax cut plan could turn Britain into a tax haven

Chancellor George Osborne is planning a huge 5% cut in corporation tax in the wake of Britain's vote to leave the European Union, in order to keep companies here and encourage more investment.

The Chancellor told the Financial Times in his first interview since the Brexit vote (British exit from the EU) that he plans to cut corporation tax from 20% to 15%. Corporation tax is a levy charged on all profits made by UK companies.

The planned tax cut would mean Britain has the lowest corporation tax rate of any developed nation and would mean the UK charges a similar rate to countries like Albania, Georgia, Latvia, Lithuania, Iraq, and Serbia, according to KMPG.

Britain is already below the global average rate of corporation tax of 23.63% and, for comparison, the US charges a 40% rate of corporation tax and Germany levies 29.72%.

George Osborne told the FT: "We must focus on the horizon and the journey ahead and make the most of the hand we've been dealt."

Prior to last month's EU membership referendum Osborne and multiple other international organisations warned that a Brexit vote could hit UK growth and could even tip the UK into recession. The Chancellor told the FT in his interview published on Monday: "I don't resile from the warnings I made about the impact - including a recession."

The government is afraid that uncertainty surrounding the UK's negotiations to leave the EU will hit investment in the UK and there are already signs of international money flows drying up. The planned cut to corporation tax aims to boost inward investment.

The UK could become 'a tax haven type of economy'

But the UK is unlikely to try to lure international investment by becoming a tax haven after it leaves the European Union, according to an internal memo prepared by the body responsible for the drafting international tax rules.

The head of tax at the Organization for Economic Co-operation and Development (OECD), which advises developed nations on policy, said the UK could use its freedom from EU rules to slash corporate tax but the political price would be high.

"The negative impact of the Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer," the OECD's head of tax, Pascal Saint-Amans said in the memo, details of which were seen by Reuters.

"A further step in that direction would really turn the UK into a tax haven type of economy," he said, adding that there were practical and domestic political barriers to doing this.

The OECD declined to comment on his memo, dated June 24, and a separate one seen by Reuters, written soon afterwards, on the outlook after the June 23 vote for Value Added Tax in the United Kingdom, which is made up of Britain and northern Ireland.

Corporate tax avoidance has risen to the top of the political agenda in Britain in recent years, following revelations about the complex tax structures used by big companies like Starbucks and Google.

"The mood of the people is certainly not about giving more benefits to large MNEs (Multi-National Enterprises), making it a hard move to any new government," Saint-Amans wrote in the memo, circulated to senior OECD officials.

Saint-Amans also noted that the UK may not be able to afford to cut its tax rates much because the pressure on public finances "which may only increase with the negative impact of the Brexit on UK growth".

So-called tax havens are usually small countries with access to larger markets. Lowering tax rates actually boosts government revenue because the profits which escape tax have almost all been earned overseas. But cutting taxes costs the UK money because multinationals earn significant profits in the country, and these would otherwise yield taxes.

Also, since tax havens are usually small, the investment they attract has an outsized impact on their economies. The levels of employment attracted to Ireland and Luxembourg combined by their tax policies would have little impact on employment in the UK, home to at least 12 times more people.

Chas Roy-Chowdhury, Head of Taxation at ACCA, the professional body for accountants, agreed with the OECD analysis. He added that if the UK did try to offer tax rulings or introduce tax incentives that were contrary to the EU's rules against unfair tax competition between members, it could actually put companies off due to worries about retaliation.

"Any tax policy will be closely aligned with what the EU does because that will create much greater certainty for businesses. So while the Brexiteers (anti-EU campaigners) may be talking about all this autonomy, I think the reality is there will be very close alignment with the EU," he said.

To significantly improve its appeal to businesses, the UK would need to significantly cut its tax rate or introduce a system of "generous" tax rulings, the OECD said. Outside the EU, the UK could selectively offer foreign investors one-off tax deals - something prohibited by EU law.

The European Commission is taking legal action against Ireland and Luxembourg for allegedly giving sweetheart tax deals to companies like iPhone maker Apple and burger chain McDonalds that allowed them to shift profits from other EU nations. The countries and companies deny breaking any rules.

(Editing by Philippa Fletcher)