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Survey on UK Competitiveness: Slicing the Foreign Investment Pie

There is a strong correlation between reductions in effective tax rates and increases in foreign direct investment (FDI). We are constantly reminded of the Government's flagship competitiveness measure to cut the rate of corporation tax to 23 per cent by 2014. However, it is clear that this initiative alone will not have the desired effect of encouraging investment. Taxand UK recently surveyed a number of Tax Directors (primarily UK based multinational groups with turnover in excess of ?1billion) to understand the impact fiscal policy ha on a country's competitiveness.

36 per cent of multinational groups surveyed stated that they have considered relocating headquarters in the past three years. However, only 3 per cent have actually relocated.

Competitiveness is not all about competing for a bigger slice of the foreign direct investment pie. The recent fiscal policy has been aimed at appeasing those who explore relocating elsewhere. By way of example, the delivery of a palatable Controlled Foreign Company regime is viewed in many quarters as the panacea. This is only one piece of the puzzle and other factors, such as persistence with the 50 per cent rate of income tax, could yet prove to be counter-productive.

45 per cent of respondents confirmed that the UK tax system was important to the decision of where to relocate operations, with 10 per cent stating that it was critical and 13 per cent saying the UK tax system was not an important consideration.

39 per cent of respondents stated that the complexity of the regulations was the most negative aspect of the UK tax system, while 23 per cent were of the opinion that the approach of the tax authorities to risk and audits was the most negative aspect.

The US is by far the largest inbound investor in the UK, accounting for 27 per cent of all foreign direct investment for the year ended 31 March 2011. During recent years, US taxpayers have become more focused than ever on keeping uncertain tax positions to a minimum, while becoming increasingly dismayed at the level of costs incurred simply to ensure compliance with a tax system ever increasing in complexity.

HM Treasury should seek to minimise compliance burdens through removing unnecessary complexity and eradicating uncertainty. We have seen numerous instances in recent times where UK fiscal policy seems at odds with these goals:

(1) The "worldwide debt cap" restrictions on tax relief for financing costs, which serves no useful purpose and yet generates untold complexity for the largest taxpayers whose business the UK is competing for. (2) One-off raids on industry-specific sectors, such as banking or oil and gas, have also not gone unnoticed in the international community. (3) The spectre of a general anti-avoidance rule (GAAR) and the adverse implications that would have on achieving certainty for international investors loom large.

42 per cent of respondents stated that the reduction in the CT rate was the most positive aspect of the UK tax system (despite the fact that this will be paid for by a reduction in tax relief for capital expenditure due to be implemented April 2012). Contrary to the 23 per cent of respondents who criticised the approach of the UK tax authorities, 30 per cent of respondents said the approach of the tax authorities to risk and audits was the most positive aspect of the UK tax system. This confirms that the tax audit process and approach of tax inspectors can be an inconsistent one.

An emphatic 97 per cent of respondents stated that HM Treasury could be doing more to stimulate business in the UK.

84 per cent of respondents confirmed that the UK is a competitive place to do business with respect to other G20 jurisdictions, while 18 per cent of respondents stated that the UK is not competitive by the same measure.


Taxand's Take


Fiscal policy is clearly a factor in comparing the competitiveness of one jurisdiction to another, but it is still just one factor out of many that will include, among other things:
  • Productivity
  • Labour market conditions
  • Environment for trade
  • Education
  • Price competitiveness
  • Legislative framework in general
  • Availability of finance

The UK government has introduced some measures to improve competitiveness. However, the changes have not gone far enough to detract from the negative perception of the UK tax system, which is still characterised by inconsistencies and complexities.

Your Taxand contacts for further queries are:
David Pert
T. +44 207 715 5208
E. dpert@alvarezandmarsal.com

Shiv Mahalingham
T. +44 207 715 5234
E. smahalingham@alvarezandmarsal.com

Jonathan Hornby
T. +44 207 715 5255
E. jhornby@alvarezandmarsal.com

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Taxand's Take Author