The UK remains one of the most attractive European countries to do business in and is closing the gap on Ireland, according to KPMG’s latest report on European tax rules. However, DPT and BEPS are challenging that status quo.
Let us first rewind the clock a couple of months, and ask whether the UK continues to be a platform for investment. The answer would then have been
a resounding “yes”, backed up with solid evidence. In March 2016, KPMG published its annual tax competitiveness survey (“The home for business? Assessing the competitiveness of the UK”), setting out the results of more than 100 interviews with UK listed companies and foreign owned subsidiaries. The conclusions were clear: the UK currently has the second most “competitive” tax system for business in Europe, behind Ireland and ahead of the Netherlands.
Away from the tax arena, the UK scored highly on all other business,
economic, political and lifestyle measures.
Fast forward to today: the UK’s referendum on EU membership delivered the result which surprised many, and we are now at the start of the journey to leave the EU. If we ask ourselves the same question today, can we conclude so unreservedly that the UK is still a platform for investment?
For the reasons set out below we consider that whilst arguably there may be a deterioration in the UK’s attractiveness to foreign direct investment (“FDI”) in the short term, the medium term picture could be more positive with the potential for a return to the high levels of investment we have become accustomed to.
Firstly, business told us that one of the UK’s main strengths was political and macro-economic stability. At this moment in time, stability may seem a
distant memory. However, there are already signs that suggest political instability should be short lived. In terms of the wider economy, the consistent
(post-referendum) message from politicians and officials has been the need for economic stability and strength, for an environment which supports domestic and cross-border business and facilitates growth.
In order to achieve this,given the current volatility that exists in the market on location decisions, rapid action will need to be taken by the new Chancellor of the Exchequer that is right for business in the long-term, whether this is in relation to tax policy, single market access or mutual regulatory recognition. That will take a collective effort not just of the UK Government, but also regulators and other bodies such as the Bank of England. The UK does not want to be at the mercy of other countries taking advantage of the short term volatility in the UK to drag business and FDI away (although there will of course be some investors who see UK assets as more attractive given the recent falls in Sterling).
Secondly, other aspects which have historically been key to FDI are a sizeable domestic market, availability and cost of skilled labour and quality of life. The economy will need to be stabilised in the coming months in order to prevent these aspects deteriorating significantly.
Finally we consider tax attractiveness. The message we received
from respondents to our survey was clear: 75% of respondents cited tax
attractiveness as a key influence in where to locate business. And by this, respondents meant stability in the tax regime over the years (89%), advance warning of changes (85%), simplicity (84%), and a low effective tax rate (76%). Despite fundamental changes to the wider corporate tax landscape with the implementation of the OECD’s BEPS (Base Erosion and Profit Shifting) project, we consider that all of these matters are well within the control of the Government - even in a Brexit environment. Where we have seen the UK suffer in recent years has been when new tax measures have been introduced rapidly and with limited consultation – the most obvious example being the diverted profits tax (DPT) regime.
Brexit will no doubt create short term instability. However, the UK currently
has a solid foundation on which to quickly rebuild. Providing the Brexit negotiations put the economy as a priority, many of the attributes which make the UK an attractive location for FDI could survive relatively unscathed. If a commitment is made to ensuring tax policy decisions reinforce the UK as a place to do, and bring, business (for example, the recent proposals to further reduce the headline rate of corporation tax to 15%), we consider that the UK has the potential to regain its position at the top of the tax leader board.