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During the run-up to the European Referendum, a number of articles are taking a superficial, or perhaps oblique, look at a number issues and fails to recognise several of the most significant potential impacts of a Brexit.
Some have stated that, upon a Brexit, the UK could do more to attract inward investment, presumably by “going it alone” and offering to foreign multinationals tax breaks not available elsewhere. What this neglects to recognise is that “going it alone” would run counter to multinational efforts by the OECD, the EU and national governments, including that of the UK, over the past several decades to try to bring some consistency and, dare I say, sanity to the international tax system. Such consistency and sanity is in the interest of both multinational enterprises (as it reduces the risks of double or more taxation, where the same income is subject to taxation in two or more jurisdictions) and of national governments (as it reduces the potential for double non-taxation where an MNE arbitrages differences between national tax systems to escape taxation completely on all or some of its income). Contrary to some widely publicised opinions which suggest that most MNEs engage in such tax arbitrage, most actually welcome increased consistency in international tax rules, as do most tax policy makers, because this leads to greater simplicity in the system and reduces the distortionary effects of tax-driven business planning, allowing market forces to more properly influence the allocation of economic resources.
Moreover, to suggest that the UK could offer tax breaks to MNEs without generating responses from other countries is somewhat naïve. In fact, it is this type of “race to the bottom”, in which countries erode each other’s corporate tax bases, that is one of the impetuses behind recent efforts of many governments to bring more consistency to their tax systems.
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So while following a Brexit the UK “could do more to attract inward investment” through its tax system, would it? And would it be wise to do so?