The United Kingdom Government Has Introduced Legislation That Provides For Devolution of Corporation Tax Rate Setting Powers to the Northern Ireland Assembly (“NIA”) For Certain Trading Profits Arising In Northern Ireland
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The Corporation Tax (Northern Ireland) Act 2015 became law in the United Kingdom in March 2015, and, in November 2015, the Northern Ireland executive and UK and Irish governments agreed a set of actions that should, among other things, facilitate the implementation of a corporation tax rate reduction in Northern Ireland.
The law provides that the NIA may, by way of resolution, set a rate of corporation tax on certain profits arising in Northern Ireland that is different from the main rate of corporation tax in the United Kingdom (currently 20 percent). The expectation is that the rate of corporation tax that will apply
to profits arising in Northern Ireland will be reduced to 12.5 percent. This is the same as the current rate of corporation tax in the neighboring Republic of Ireland.
Background and Details
The United Kingdom Government is committed to creating the most competitive tax system in the G20 to both stimulate UK growth and encourage foreign direct investment. Recognizing that the Northern Ireland economy has been over-dependent on the public sector in the past and that it cannot compete effectively with the low tax jurisdiction across the land border of Ireland, it is anticipated that the lowering of the corporate tax rate will stimulate growth, lead to job creation, and increase private-sector investment in the country.
The Corporation Tax (Northern Ireland) Act 2015 empowers the NIA to set a corporation tax rate by way of resolution. The power to set the rate is only exercisable once the commencement financial year has been appointed by the UK Government by way of statutory instrument. To date, no such commencement order has been made. While the legislation provides that the rate set could be as low as zero percent, it is expected that a rate of 12.5 percent will be implemented effective from April 1, 2018.
Once in force, the Northern Ireland tax rate will apply to certain trading profits arising in Northern Ireland. There are separate regimes for Small and Medium-sized Enterprises (“SMEs”) and for large companies which are discussed in more detail below
SMEs (i.e., those companies belonging to groups with less than 250 employees, and with either less than €50m turnover or €43m balance sheet total) that have employees in Northern Ireland will qualify for the reduced rate of corporation tax on all of their qualifying UK profits on the basis of an “in/out” test. If at least 75 percent of both working time and workforce expenses of company employees in the United Kingdom relate to time those employees spend in Northern Ireland, then 100 percent of the qualifying profits of the company will benefit from the Northern Ireland corporation tax rate. If the 75-percent test is not met, then none of the profits will qualify for the reduced rate.
Large company regime
Large companies are required to determine whether they have a Northern Ireland Regional Establishment (“NIRE”), i.e., a permanent establishment in Northern Ireland. If so, then the qualifying profits attributable to that NIRE will benefit from the reduced rate. The tests for determining whether a company has a NIRE and if so how profits are allocated broadly follow the UK rules for permanent establishments. Only profits arising from genuine activities in Northern Ireland will therefore qualify for the 12.5-percent rate.
Only trading profits can benefit from the reduced rate in Northern Ireland, and certain trades and activities are excluded.
Excluded trades are:
- Ring-fence oil & gas activities
- Lending and investing activities
- Investment management
- Long-term insurance business
- Re-insurance business
Profits arising from back office functions of the excluded trades listed above, with the exception of oil & gas and re-insurance business, can also qualify for the Northern Ireland rate by election. In quantifying the profit arising from those qualifying back office functions, the statute provides for cost plus five percent.
The United Kingdom has successfully implemented corporate tax reform to encourage inbound investment, stimulate growth, and create jobs. However, at 20 percent (reducing to 18 percent by April 1, 2020), the corporation tax rate in Northern Ireland cannot compete with 12.5 percent in Dublin across the border. The proposed rate reduction for Northern Ireland should level the playing field, and United States multinational companies looking to invest in the United Kingdom might therefore consider whether Belfast, rather than elsewhere in the United Kingdom, is a viable location for their business.
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