The move will bring the it’s corporate tax regime in line with the Republic of Ireland's. Northern Ireland’s current corporation tax rate stands at the UK-wide rate of 20%. The cut to 12.5% aims to make Northern Ireland more competitive in the fight for foreign direct investment (FDI).
The Republic has had a 12.5% corporate tax rate for more than ten years – one of the lowest in Europe - making it a popular choice for FDI.
Apple, Google and Facebook all have their international headquarters based in the Republic of Ireland and a number of US technology, healthcare and pharmaceutical companies have operations in the country.
The Republic has repeatedly been accused of being a tax haven for foreign firms and has come under fire for hosting US based companies, enabling them to avoid paying US taxes.
The European Commission is currently investigating Apple’s tax arrangements in Ireland.
Northern Ireland’s tax cut is part of a number of financial measures, agreed at Stormont House by Sinn Fein and the DUP and detailed in the publication “A Fresh Start - The Stormont Agreement and Implementation Plan”.
As part of the agreement, the Executive will be handed power to set its own rate of corporation tax and will have to meet the full cost of the devolution of corporation tax.
Nigel Smyth, regional director of CBI Northern Ireland said, “There is widespread agreement that to transform the Northern Ireland economy away from its dependence on public expenditure a powerful fiscal incentive will be necessary, to help stimulate the necessary private sector investment.”
According to Smyth, research is already underway to assess what sectors and countries should be targeted for this lower corporate tax rate.
“Clearly from experience we know that US companies will be interested and indeed Northern Ireland already has a long history of attracting investment from the US. However a lower corporate tax rate will attract ‘profit centres’ rather than cost centres. While this is significant in the Northern Ireland context – and is expected to result in around 3000 additional jobs per year, this will have limited impact on the rest of the UK,” he added.
Smyth does not believe that Northern Ireland’s new tax rate will have a negative impact on the Republic’s competitiveness.
“A successful Northern Ireland economy is good for the Republic of Ireland, in the same way a successful Republic of Ireland economy is for the Northern Ireland economy.”
However, he acknowledges that Northern Ireland does have lower labour and office costs than the Republic of Ireland.
Action Aid have criticised Northern Ireland's decision to cut its corporation tax saying it only adds to global inequality. Barry Johnston, director of advocacy at Action Aid said, “The public are furious about corporations not paying their fair share of tax, yet companies are being offered lower and lower tax rates. This is part of a wider trend producing a global race to the bottom on corporate tax rates, which contribute to rising inequality in rich and poor countries."
He added that people living in poverty are being hit hardest, with developing countries losing out on billions of pounds each year to tax avoidance.
“If global poverty is to be addressed effectively governments must take action to tackle tax avoidance and ensure that multinationals pay their fair share of tax.”