Corporation tax and the blindingly obvious

Some interesting research caught my eye recently. It came from the Grant Thornton International network, which had carried out a survey of more than 3,400 businesses in 44 economies on the subject of corporation tax. Specifically, it asked businesses whether they would consider relocating to another country in order to cut their corporation tax bill. The overwhelming response was ‘no’ with two-thirds of businesses unwilling to budge.

I like surveys such as these – they are what I call “research that supports the blindingly obvious”. But sometimes the blindingly obvious needs to be said. Of course, two-thirds of businesses wouldn’t move country to cut their corporation tax bill; in fact, I’m surprised the figure was as low as that. FTSE 100 giants such as WPP might have the resources to up sticks and headquarter themselves in another part of the world if they find that their current tax regime doesn’t agree with them, but it’s not a realistic option for most businesses.

The thing about businesses is that that they tend to have owners who are not necessarily institutional shareholders and might quite like where they live. Even if they don’t like where they live, that doesn’t mean they can fly away to the Bahamas at the drop of a hat and set up shop there. For starters, they need to have the legal right to live and work in that country. Then there are the considerable issues of finding suitably skilled people to work for them, leaving an existing network of contacts behind and managing relationships with customers and suppliers from a different location – and that’s even before you get on to hurdles such as language, regulation, logistics, foreign exchange rates and time zones.

According to Grant Thornton’s research, business leaders in New Zealand are most resistant to relocation. This is an interesting case in point. Although New Zealanders could theoretically head to Australia (same language, similar culture, better weather, not that far away in the scheme of things), there would be no point in their doing so at present since the corporation tax rate is higher over there. Even if it were lower, New Zealand is not a ‘big business’ country – 97% of its businesses are SMEs and relocation tends not to be an attractive option for them. SMEs are usually heavily reliant on their relationships with local customers and the networks that they have built up over time. Also, their products and services tend to be influenced by, and tailored to, the environment that surrounds them. Besides, when you live in a nice country that is a straightforward place to do business in, why would you want the hassle of starting again across the ditch?

Interestingly, the same research found that businesses in Russia, India, Taiwan, Greece, Botswana and Norway would be most likely to move for a lower corporate tax rate. But both you and I would hazard that there are other reasons why business leaders from some of those countries would like to move and it probably doesn’t come down to tax.

Ultimately, tax is just one factor that companies take into consideration when deciding where to headquarter their business – there are many other (arguably more important) considerations besides. Any business thinking of relocating to achieve a reduction in corporation tax needs to weigh up the risks very carefully. Tax is such a political football. Who wants to move only to find that the tax break that attracted you in the first place turned out to be very short-term?

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