Commentary on Boris Johnson's December Review of the Competitiveness of London's Financial Centre

Richard Murphy comments on a recent economic report, and looks ahead to the future of the UK tax regime and tax profession.

The thinking within the report represents much that the tax profession will be familiar with, which is unsurprising as KPMG and many major banks were represented amongst those preparing it. In particular they said that three tax reforms were required if London was to maintain its position as a world-beating financial centre. The first was to improve the process of introducing new tax policy by forming a panel of industry experts to support HMT and HMRC pre-consultation. The second was to use the tax system to reinforce the UK as the most attractive geographic location for companies to base their headquarters or regional holding companies. Finally they asked for formalisation of the UK’s corporation tax policy to demonstrate the UK’s intention to remain globally competitive. As part of this the Review Panel requested an annual independent international benchmarking of the UK’s tax regime.

The Review is fascinating for a number of reasons. First of all it may be seen as an indication of current Conservative thinking. Second, that implies that there is a very marked difference between their approach and that of all other political parties in the UK. Thirdly, it raises question as to what role corporation tax has in the domestic economy at this time.

It is especially important to put this in the context of the moment. Bank rates in the UK are currently at 2%, and falling. Those in the USA are almost 0%. Effectively monetary policy ceases to be a weapon of economic control when that point is reached. Fiscal policy is all that is left. This is the current reality, and it is going to persist for a year or more. In that case, is the tax debate with which we are familiar, and which this report from Boris Johnson and his Review Panel reiterates, one that is sustainable? Moreover, can the tax profession justify making requests of this sort and retain its credibility when it is clear that the economic environment has fundamentally changed over the last few months?

My suggestion, with which I know many will disagree, is that at this moment the tax profession needs to radically review the role it sees corporation taxes in particular playing within our economy. The economic logic which has underpinned much existing strategy towards this tax appears to have failed. It is true that we have global markets, but now it has become very apparent that many of our major companies are heavily dependent upon governments to ensure their long-term survival. In that case it may be that they have a particular duty to the jurisdiction in which their head office is located, whatever the scope of their global operation. In addition, choosing a head office location in some places that the Review compared to London may not appear quite so appropriate now. It is unlikely that Ireland, Luxembourg, Bermuda, Dubai or Singapore would have or could have bailed out the UK banks as has happened: in many cases they would not have enjoyed the resources needed to do so. In that case what does tax competition between states of the sort that the Review appears to both condone and encourage mean?

Over the last 20 years or so tax competition has been promoted as a mechanism for restraining the growth of government, so providing business with the low-regulation, low-tax environment in which it was assumed to flourish. Tax havens, including the list named by the Review as places with which London should be compared, were a particular component in this process by seeking to drive down corporation tax rates and in offering low-regulation environments: features which, if the Review is to be believed, London is lacking.

The political approach to regulation has, however, changed almost without exception around the world as 2008 has progressed. As banks have, with rare exceptions, needed state support the demands for regulation have increased. Right or wrong, it is hard to see them being refused.

Tax has not, as yet, moved in the same direction. This may not last. Tax cuts are on the immediate agenda of many governments to create a ‘fiscal stimulus’. Few doubt that they will be matched by tax rises in the future. When it is apparent that some of those organisations that are receiving bail-outs are at the same time substantially cutting their taxation rates and payments it may well be the case that political demands will require increases in corporation tax contributions. The burden of the bail-out cannot fall on the middle classes alone as would be the case, for example, if Goldman Sachs’ decline in effective tax rate from 34% in 2007 to less than 1% in 2008 (apparently as a result of the changed geographic mix of its profits, maybe implying the relocation of the remaining elements to tax havens) were replicated across the banking sector.

This creates an issue that I think the tax profession needs to address. Can our institutes take the risk of alienating domestic, resident audiences by arguing for corporation tax cuts and an increase in tax competition at the time that increasing demands for taxation revenue will already be placing additional burdens on the middle classes? Can they, in other words, pander to the multinational sector at the same time as keeping the domestic market happy? During the long boom this has been possible. But is it now?

No one as yet appears to be rising to this challenge, especially as the institutes also need to decide if they can embrace fiscal policy, the conflict between the national interest and global forces, the differing claims within society for tax relief and consequent burdens, and the continuing demand for tax simplification and transparency. This is a whole new agenda for the profession.

It's my suggestion that the old answers will not work and that those institutes that can show that they can think in this new way will significantly increase their stature in 2009. Those that remain committed to the old answers will, to be candid, be disregarded by those in power, a situation that few in these organisations can afford.

2009 will be a difficult year. But just as the economy will emerge from recession quite different, so too, I think, will the tax profession. I suggest that Boris Johnson’s Review is the last-gasp of the old tax order. I suspect that one or two of the tax bodies will lead the way to something quite different and new. I won't be so bold as to suggest which, but I think those that do will secure a significant competitive advantage for themselves, not least in the process of consulting with government about the legislative changes that will affect our whole future.

Note: to download the review, visit: http://www.london.gov.uk/mayor/economy/london-winning.jsp

Article Added Saturday, 03 January 2009

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