March 26, 2019

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Haven Our Cake And Eating It

In a recent interview with Tax Analysts, Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, was asked how concerned he was that the UK will end up going the tax haven route following withdrawal from the EU.  He said:

“The U.K. wants companies to pay taxes — not much tax, because they want to be very competitive, and they have a very competitive system. Now, can they go much further in [terms of] competitiveness? Yes, they may cut their taxes a bit more, but there’s not much room [that] would drive dramatic change. The margin for slashing taxes is very limited because their taxes are already pretty low.”

So, not that concerned it would seem.

That seems to us to be the correct analysis.  The UK does indeed have a very competitive tax system at present, ironically in part due to changes required by European law.  A low rate of corporation tax (currently 20%, dropping to 19% from 1 April this year and falling further to 17% by 2020), a corporate dividend exemption, a substantial shareholding exemption that is being further relaxed, no dividend withholding tax, manageable controlled foreign company rules and an impressive double tax treaty network.

The expression “tax haven” has become so debased in recent discussions so as to be essentially meaningless, but what could the UK do to make it look like the traditional tax havens, such as the Cayman Islands?

It could abolish corporation tax.  The problem is that those who advocate such a radical route tend also to conclude that it would need to be replaced with a tax on distributed earnings at the shareholder level, including non-resident shareholders, in order to recoup the billions of pounds of revenue foregone.  Which doesn’t sound much like a tax haven.

Maybe the UK could become a tax haven for individuals, with say a flat rate of income tax at 20%.  Well, it could do, but that would also leave a significant shortfall in government revenues, which would need to be replaced by higher taxes elsewhere, or even greater reductions in government spending.  If one looks at the profile of those who voted to leave the EU, and their reasons for doing so, a policy that involves those on higher incomes (the perceived elites) retaining a substantially greater proportion of those incomes is unlikely to be popular, especially if it comes at the cost of deeper or longer austerity.

The IFS warned earlier this week that UK tax burdens will soar to the highest level for 30 years.

Although the future shape of the UK’s fiscal model is inevitably going to have to adapt to a new post-Brexit reality, the budgetary constraints on the country mean that the UK simply can’t afford to become a tax haven post Brexit, and that it would be electoral suicide for a government to try. Future developments in the competitiveness of the UK’s tax system are going to need to be far more subtle than simply gaming headline rates.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Jeremy Cape, Squire PB, tax attorney
Partner

Jeremy Cape is a tax and public policy partner in the London office, advising on a wide range of issues, including M&A, private equity, finance, restructuring and insolvency, and VAT. He has substantial experience in both domestic and global matters, with specific expertise regarding emerging markets and Africa, counselling both governments and taxpayers. His current initiatives include helping businesses deal with the introduction of VAT in the Gulf in 2018 and helping both UK and international businesses plan for Brexit.

Jeremy is frequently quoted and cited...

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Robert O'Hare, Squire Patton Boggs Law Firm, Professional Support Lawyer
Professional Support Lawyer

Robert O’Hare is a professional support lawyer in the firm’s Tax Strategy & Benefits Practice Group. He is predominantly based in the London office.

Primarily a corporate tax specialist, Robert has wide-ranging experience of advising clients on the full range of corporate tax issues and has specialist knowledge of UK and cross-border corporate acquisitions, public market and financing transactions alongside both private equity and retail investment fund structuring. 

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