Brexit Britain won't work as tax haven, says OECD

As Chancellor George Osborne proposed to slash corporation tax, a memo by a body which drafts international tax rules revealed that the UK is unlikely to entice business by becoming a tax haven post-Brexit.

"The negative impact of Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer. A further step in that direction would really turn the UK into a tax haven type of economy,” said Pascal Saint-Amans, head of the Organisation for Economic Co-operation and Development (OECD), in a memo dated 24 June reported by Reuters.

The OECD said to attract to business, the UK would need to cut its tax rate considerably or bring in “generous” tax rules.

On Friday Osborne said he wants to lower corporation tax to less than 15%, down from 20% today to show that Britain was “open for business” post Brexit.

Osborne told the Financial Times, in his first interview since the referendum result, “We must focus on the horizon and the journey ahead and make the most of the hand we’ve been dealt”.

Osborne said he wanted to build a “super competitive economy” with a global objective and low business tax.

However, Saint-Amans said there were practical and domestic political obstacles to achieving this and that the UK might not be able to afford it, due to pressure on public finances "which may only increase with the negative impact of Brexit on UK growth".

The UK is the process of cutting its corporation tax to 17% compared to an average of 25% in OECD members. In Ireland, a low tax haven, corporation tax is 12.5%.

The UK had also introduced tax breaks for companies to pay lower rates on some income and no tax on earnings made from tax haven subsidiaries.

There was also a separate memo reported by Reuters from the OECD about value added tax (VAT), and area where the UK could take advantage from not being in the European Union (EU).

“It might now consider reviewing its domestic rules to remove the VAT burden on its financial services industry, which would create a major competitive advantage for the City compared to other financial centres in the EU,” the OECD said.

Most EU businesses are allowed to reclaim VAT on inputs such as equipment and office supplies, but financial services providers cannot and charge VAT to their clients.

However, the OECD memo said Brexit would bring new VAT compliance costs that “will add to the competitive disadvantages for UK businesses trading with the EU compared to their EU competitors”.

Tax havens tend to be small countries which have access to larger markets and have a low population. Low tax rates tend to increase government revenue as most of the profits by multinationals are earned overseas. In the UK, however, most multinationals earn significant profits in the country which would return tax. The UK’s larger population would not be outsized by the potential investment by business.