Can the UK tax system remain competitive after BEPS?

In implementing proposals emanating from the OECD BEPS project, there will be tensions between the UK government’s competitiveness agenda and its support for BEPS. Until now the UK has aimed to be competitive by having a low statutory tax rate and by designing specific regimes to attract mobile capital, such as CFC rules, interest deductibility rules and the Patent Box. But implementing BEPS proposals will make generosity in such special regimes more difficult to sustain - the government may have to tighten some specific measures aimed at attracting highly mobile capital and profits such as the patent box regime and possibly interest deductions. The government could attempt to offset such measures by further cuts in the tax rate, which it has already begun to do with the recent announcement of a reduction of the rate to 18% in 2020. But the government could also move away from the broad-base low-rate agenda by narrowing the tax base more generally. For example, it could increase capital allowances or introduce an Allowance for Corporate Equity. Both of these measures would be supported by economic theory. Currently allowances in the UK are lower than other countries, creating a greater disincentive to locate and invest in the UK. And introducing an ACE would remove the preferential treatment of debt at the same time as taxing only profit above the normal rate of return – which would also reduce disincentives to locate and invest in the UK.

Giorgia Maffini and Richard Collier