Cutting the corporate tax rate is unlikely to be enough to encourage FDI, says KPMG
Commenting on the Prime Minister’s commitment for the UK to maintain its status as having the lowest corporation tax rate in the G20, Robin Walduck, tax partner at KPMG in the UK, said:
“For a decade now, the UK government has pursued a strategy of ensuring that the tax system is designed to attract foreign direct investment. This has been largely successful and ongoing cuts to the corporate tax rate have been a helpful component. The proposal was previously to reduce the corporate tax rate, currently 20%, to 17% in 2020. This represents a considerable reduction from the 30% rate ten years ago, or indeed the 28% rate when the Conservative party entered government in a coalition with the Liberal Democrats. Today’s proposal is to potentially reduce that rate still further in order that the UK retains the lowest corporation tax in the G20 should President-Elect, Donald Trump, follow through on his pledge to cut the federal business tax rate from 35% to 15%.
“Does this mean there's now a global race to the bottom? Any further reduction on the headline rate would certainly bring the UK rate close to Ireland’s own corporate tax rate, which has remained static at 12.5% for many years. There has also been very limited activity in recent years by other G20 members in aggressively reducing their own rates, with the exception of Australia (although even Australia’s proposal to reduce rates from 30% to 25% would only happen over a ten year period from this year). As such, the answer to this could largely depend on what Donald Trump prioritises when he takes office in January.
“Will a further cut really make a difference? Whilst from a policy perspective it may help towards making the UK a ‘super-competitive economy’, a reduction in rates will likely not be enough on its own to drive FDI. KPMG surveys of clients have consistently concluded that companies want stability, predictability and certainty, both in economic (including tax) and political terms. Whilst the current political and economic volatility prevails and uncertainty over a post-Brexit UK remains, we may find a reduction in the headline rate alone will not be enough to encourage companies to invest.”
