“The negative impact of the Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer," the OECD’s head of tax, Pascal Saint-Amans said in the memo, details of which were reported by Reuters on Sunday.
"A further step in that direction would really turn the UK into a tax haven type of economy," he said, adding that there were practical and domestic political barriers to doing this.
The memo came to light just as chancellor George Osborne, in an interview published by the Financial Times on Sunday, announced plans to further reduce corporation tax to below 15% as part of his five-point plan to galvanise the UK’s post-Brexit economy.
Despite Saint-Amans concerns, he states that the practical and domestic political barriers meanth that it was unlikely the the UK would try to lure international investment by becoming a tax haven.
“The mood of the people is certainly not about giving more benefits to large [multi-national enterprises] making it a hard move to any new government,” Saint-Amans wrote to senior OECD officials.
He also cited pressure on public finances as a barrier to the UK cutting its tax rates much further.
To significantly improve its appeal to businesses, the UK would need to significantly cut its tax rate or introduce a “generous” system of tax rulings, Saint-Amans said.
Outside of the EU, however, the UK could selectively offer foreign investors one-off tax deals. Something that is currently prohibited by EU law.
Financial services oportunity
In a separate memo, also seen by Reuters, the OECD highlighted that value added tax (VAT) could be one area in which the UK could become materially more competitive.
Currently, most EU businesses are allowed to reclaim VAT. Financial services providers, however, are unable to do so as they do not charge VAT to clients.
Freed from EU rules, the UK would be able to “review its domestic rules to remove the VAT burden on its financial services industry, which would create a major competitive advantage for the city, compared with other financial centres in the EU”, the unidentified OECD author said.
Otherwise, leaving the EU will bring new VAT compliance burdens and costs that “will add to the competitive disadvantages for UK businesses trading with the EU compared to their EU competitors”, the VAT memo said.
Corporation tax cuts
In the March 2016 budget, Osborne outlined plans to cut corporation tax to 17% from 20% by 2020.
The average among other Organisation for Economic Cooperation and Development members is around 25%.
In his interview with the FT, Osborne outlined the other elements of his five-point plan, which include;
- a new push for investment from China,
- ensuring support for bank lending;
- redoubling efforts to invest in the northern powerhouse; and
- maintaining the UK’s fiscal credibility.