Maffini, Giorgia

English

Oxford University, Saïd Business School: Eureka

A British lesson in corporate income 
tax 
March 2015 
Giorgia Maffini 
Centre for Business Taxation 
Policy paper series 
Printed in the Italian in  
Il Sole 24 Ore, 2 March 2015 
1 
 
 
Centre for Business Taxation Policy Brief 
A British lesson in corporate income tax 
 
Giorgia Maffini 
Senior Research Fellow and Leverhulme EC Fellow 
Oxford University, Centre for Business Taxation 
 
Over the last thirty years, OECD countries have significantly reduced the statutory rates of 
corporation tax (CIT) to attract increasingly mobile activities and profits. This trend had slowed 
by 2010 when the Coalition government took office. At that time, at the height of the global 
financial crisis, governments were struggling to reduce their budget deficits and there was little 
room for large tax cuts. The Coalition government had a very different plan, despite having 
inherited one of the largest deficits in the OECD. The goal was ambitious: to make the corporate 
income tax system the most competitive in the G20. There followed five years of intensive 
reforms, including a gradual cut in the statutory CIT rate from 28 to 20% and other 
interventions aimed at reducing the cost of capital (COC), such as the preservation of generous 
deductions for interest expenses and the modernization of the controlled foreign companies 
(CFC) legislation. The CFC regime now allows the financing of an international group through 
subsidiaries resident in low-tax jurisdictions. 
To support innovation, the Coalition introduced the Patent Box (PB) with a rate of 10% on 
profits derived from patents and simplified and expanded the generosity of Research and 
Development (R&D) tax credits. The PB also aims to prevent the migration of intangibles to low-
tax jurisdictions. The overall reform will cost between 20 and 24% of the average annual CIT 
revenues by 2015/16. These are substantial costs, funded by combining a higher deficit, a 
reduction in public spending and an increase in VAT.  
What are the benefits of such a reform plan? The UK tax system is now very attractive for 
international companies, in particular for their headquarters and for companies with intangible 
assets. This explains, for example, the location of the headquarters of Fiat Chrysler Automobile 
in London and the transfer of the headquarters of General Electric Oil & Gas from Florence to 
the UK capital.  
The current features of the UK business tax regime cannot be found jointly in any other 
comparable OECD economy. For example, France, Germany and Italy have high statutory CIT 
rates (see figure 1) and more restrictive regimes for the deduction of interest expenses and for 
the taxation of CFCs. French R&D incentives are more generous than the British ones and France 
even has a PB (15%). However, with a statutory rate of 33.3%, France has introduced an 
additional rate of 3.3% for companies with a global corporate income tax charge above EUR 
2 
 
763,000 and an additional surcharge of 10.7% for companies with more than EUR 250 million 
turnover.  Apart from minor changes, Germany has not substantially altered its regime between 
2010 and 2015. Italy has instead introduced some innovative measures. Despite a higher rate 
(15.7%), the Italian PB also applies to trademarks and designs, excluded from the UK PB. The 
Allowance for Corporate Equity (ACE) reduces the COC as it allows a notional deduction of the 
cost of financing with new capital. The ACE aims to equalize the tax treatment of equity 
financing with that of debt financing.  
Despite some undeniable success, the British government has not fully hit the goal of having the 
most competitive regime in the G20. Three indicators measuring the costs of the tax system on 
business decisions are useful to assess this. The statutory CIT rate quantifies the incentive to 
shift profits where the rate is lower, regardless of where the real assets are located. When 
considering foreign direct investment (FDI), economists use the effective average tax rate 
(EATR). After investment has been located in a particular jurisdiction, the incentive to expand it 
is measured by the effective marginal tax rate (EMTR). In 2015, the UK statutory tax rate and 
the EATR are well below the OECD average (figure 1 and 2) but the EMTR remains well above 
that (figure 3). 
This means that the UK is competitive in attracting profits and FDI, but it remains less so in 
terms of expanding real investment already located in Britain. A high EMTR depends on the 
regime for capital allowances, one of the least generous in the OECD and therefore relatively 
disadvantageous for sectors with large investments in machinery and buildings such as 
manufacturing. The picture does not change by referring to the G20 countries. The UK has the 
lowest statutory CIT tax rate along with Russia, Turkey and Saudi Arabia, but it ranks only fifth 
for the EATR. The EMTR is only in tenth place in a ranking that sees Italy in first place, because 
of the ACE and relatively generous capital allowances. 
With elections looming, the question is what the new British government will do. If the Labour 
Party wins, it will not cut the 2015 CIT rate to 20% but it will maintain it at 21%. The difference 
is minimal and this reflects the current consensus for a rate of around 20%. More generally, 
many measures introduced by the Coalition had already been proposed by the previous Labour 
government, which has not really opposed the Coalition's competitiveness agenda. The 
opposition has instead come from some countries, particularly Germany, concerned about the 
possible erosion of their tax base through measures such as the PB.  
If the pressure from other countries and the OECD grows, the UK could adapt some parts of its 
tax code to the international consensus, but at the same time, to maintain competitiveness, it 
could cut the statutory CIT rate even further. Some large companies already propose a rate of 
15% but with a system that is for now competitive and a deficit which is still large, the priority 
will probably be to improve public finances.  
 
Article originally published in Italian on “Il Sole 24 Ore”, 2 March 2015 - http://24o.it/CY3wuK 
The article has been translated by the author and is based on the Centre for Business Taxation 
Report “Business Taxation under the Coalition Government” - 
http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Events/conferences/2015/Bus
iness_Tax/cbt-coalition-report-final.pdf 
3 
 
Figure 1. Statutory corporate tax rate 
 
Figure 2. Effective average tax rate (EATR) 
 
 
 
 
10%
15%
20%
25%
30%
35%
40%
45%
2000 2001 2002 2003 2004 2005 2006 2007 20082009 2010 2011 2012 2013 2014 2015
Francia Germania Italia OECD UK
10%
15%
20%
25%
30%
35%
2000 2001 2002 2003 2004 2005 2006 2007 20082009 2010 2011 2012 2013 2014 2015
Francia Germany Italia OECD UK
4 
 
Figure 3. Effective marginal tax rate (EMTR) 
 
-10%
-5%
0%
5%
10%
15%
20%
25%
2000 2002 2004 2006 2008 2010 2012 2014
Francia Germania Italia OECD UK


A British lesson in corporate income tax

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A British lesson in corporate income tax

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