Financial Secretary to the Treasury's speech to American Enterprise Institute

Financial Secretary David Gauke today (Tuesday 29 September) delivered a speech to the American Enterprise Institute in Washington DC.

The Rt Hon David Gauke MP

Good morning – I’m delighted to be here.

Both the UK and the United States have long and powerful traditions of free trade and entrepreneurship. Our economies are open, liberal and always interested in exploring new opportunities. That’s what drives our nations’ wellbeing, and that’s been the case for decades if not centuries.

The last few years have seen tough times globally as well as nationally. In 2010, we in the UK embarked on a programme to ride out the storm and secure long-term prosperity – we called it the “long-term economic plan”.

It was a combination of cutting back on spending the State could not afford; and unleashing growth in the private sector.

In the UK government, I am the minister responsible for the taxation system.

It’s a fascinating job, not least because one of the quickest methods of improving – or destroying – a country’s competitiveness is through the taxation system.

Our tax policies stem from a very simple belief: that a low-tax and a efficient-tax economy is fundamental to growth, and that you can only get a functioning low-tax economy if you collect the taxes that are owed.

We believe that this is what helps businesses prosper: the competitiveness of low taxes, and the certainty of having a properly working tax system in place.

These are the two principles of taxation in the United Kingdom – and together, I believe they help make the UK one of the best places to do business in the world.

It’s almost 150 years since the first American multinational, the sewing machine manufacturer Singer, opened its first overseas factory, in Glasgow. Since then the world has become more interconnected than our ancestors could have ever imagined.

In basic terms, that gives multinational companies a lot of choices; about where they create jobs; where they conduct research and development; or where their base their headquarters.

The UK’s ambition is to attract these companies: we are very honest about that.

And we know that to do so, we have to be competitive in every area.

That means world-class infrastructure; a skilled, flexible, ambitious workforce; deep and liquid capital markets – and a highly competitive tax regime.

So today, I’d like to speak about what the UK has to offer.

My first point would be that the corporation tax rate really matters.

When David Cameron became Prime Minister in 2010, our rate of corporation tax was 28%. At the same time, we faced a record budget deficit of over 10% of GDP. Times were not easy.

I think it is testimony to the importance we attach to a competitive tax system that cutting the corporation tax rate was one of the first things we did.

Some said at the time that cutting corporation tax was not a public priority – that at a time when we had to make other difficult decisions on public spending, it was irresponsible.

We looked at it another way.

The UK may be the fifth biggest economy in the world. But, in a global economy, we have to make the case that businesses choose to invest, and locate activity, in the UK.

And we can never take it for granted that they will.

It was a fact that one of the factors pushing businesses away from the UK was our tax regime.

And we didn’t believe that corporation tax fell on faceless, abstract, corporate entities – often considered the bad guys in political rhetoric.

Ultimately, corporation tax, like all taxes, falls on individuals.

A high rate of corporation tax means either lower wages for employers, higher prices for customers, or lower returns for shareholders or a combination of the three.

Moreover, analysis by the UK’s Institute of Fiscal Studies suggests that, because capital tends to be much more mobile than workers, a significant share of the burden of corporate tax will fall, not on shareholders, but on what economists call ‘labour’, and we politicians – at least in the UK – call ‘hard-working families’.

A tax on corporate profits reduces the rate of return on investment. This means that there is less investment, and that productivity doesn’t rise as quickly as it otherwise would. Lower productivity means lower wages.

In other words, all parts of society lose out if your taxes damage investment, productivity, and economic growth.

That’s why the OECD has said “corporate income taxes are the most harmful for growth, as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements”.

If I may be permitted a small digression, the history of corporation tax in the UK is informative.

According to Martin Daunton’s history of the UK tax system, in 1919, when the UK was faced with heavy post-war debt, officials from the UK’s Treasury and Inland Revenue were dispatched to the US and Canada, to examine their systems of taxation of profits.

Our officials concluded that the taxes discouraged productivity and efficiency, but noted that a corporation tax was an impersonal tax: so not a direct burden on any individual.

Officials also noted the not unrelated fact that it had the support of a large body of public opinion!

Not surprisingly, these arguments prevailed.

Since then, Governments have often found it easy to increase taxes such as corporation tax – precisely because there’s no immediate transparency about where the burden falls.

And now, 95 years on, it must be acknowledged that corporation tax has become a key part of the international tax system, one which continues to make a significant contribution to public revenues.

But our view, in the UK, is that one of the best ways you can drive growth in your economy is by lowering it.

That is why, in 2010, we chose radical action on corporation tax.

Since then, we have steadily reduced our rate of corporation from 28% tax to 20%, the lowest in the G7.

This year we announced that we would go further, cutting the rate to 19% in 2017 and 18% in 2020.

These cuts will save businesses over 10bn USD by 2021 – helping over one million businesses, whether large or small.

So what would one expect the impact of our changes to be?

Our modelling suggests that this stands to increase long-run GDP by more than 1% - which, you don’t need me to tell you, is the order of magnitude which gets Treasuries excited.

And our independent Office for Budget Responsibility estimates that these cuts, plus reforms to our investment allowances, will help increase business investment by £1.6bn a year by 2021.

And we would hope that this will be external investment too.

And what is happening?

Not only are we seeing business investment increasing – with a record number of inward investment projects last year – and some early signs of improvements in productivity.

Interestingly, we’re also seeing corporation tax receipts strengthening.

Between 2010 and 2014 – that is, during the time that we cut the headline rate from 28% to 21% and cut the small companies rate –annual receipts increased by 12%.

And if you strip out the financial services sector (where receipts have been heavily affected by losses built up in the financial crisis), CT receipts rose by 16% between 2010 and last year.

Adjusting for inflation, that means that in a period when the headline rate was cut by a quarter, we have seen a real-terms increase in revenue.

Similarly, over the past three years, we’ve seen blue-chip companies making major new investments in the UK, or actually coming back to the UK.

Our ambition is to continue that steady flow – because we believe that it is good for us and good for business.

But cutting the main rate of corporation tax – important though this is – is simply part of a wide suite of measures we are putting in place to make us as internationally competitive as we can be:

  • The Patent Box and “above the line” tax credit for R&D
  • Sectorial reliefs for creative industries
  • Modernising the CFC regime

We have also introduced measures designed to help small businesses.

So, for example, in the last Budget, we set our Annual Investment Allowance at a permanent rate of £200,000 – the highest it’s ever been.

That means businesses can write down 100% of their capital investment up to £200,000, a major incentive for start-ups and small firms.

We’re introducing a business tax roadmap by April next year, setting out our plans on business taxes for the next four years, to give businesses certainty about the environment they will be existing in.

And on top of that, we are simplifying the way tax is collected and paid – because though probably won’t get anyone to enjoy paying tax, we can at least make it a simpler activity.

We will always be on the side of competition between countries. Our measures back that up. But we will be equally firm in demanding that that competition is fair and transparent.

We take this seriously – because a stable, functioning tax system depends on everybody playing by the rules, and because operating in a system where the rules are clearly defined gives certainty to shareholders and investors. Sticking to the rules benefits everyone concerned.

I want to be very clear: the UK is not a jurisdiction which offers preferential deals.

Yes, it is possible to enter into Advanced Pricing Agreements, but these are based on a fair and consistent application of the law.

And at a time when the European Commission is – rightly – ensuring that EU member states do not offer preferential tax deals which constitute State Aid, our approach is sustainable, and offers stability and certainty.

When the UK hosted the G8 summit at Lough Erne in 2013, the Prime Minister used that opportunity to impress upon his fellow world leaders the need to act together in tackling corporate tax avoidance.

The UK has taken a leading role on the international stage in initiating, and taking forward, the Base Erosion and Profit Shifting project – BEPS for short – through the G20 and OECD.

Our ambition is simple: an international system with coherent rules that ensures all companies pay their share – and that isn’t open to abuse.

The OECD are due to report the final BEPS outcomes to G20 Finance Ministers at their meeting next week.

Significant progress has already been made. We now have an internationally agreed template for businesses to report to tax authorities where they pay tax and where they make profits.

This is a good initiative which will increase transparency – we strongly support it.

And domestically, we have introduced a Diverted Profits Tax, to protect ourselves against contrived arrangements to avoid UK tax.

Its objective is simple: to ensure profits are taxed in the UK when the economic activities that give rise to them take place there.

There are a few things I would like to make clear about DPT

It is a targeted measure, designed to counter the use of aggressive tax planning techniques used by some multinationals to divert profits from the UK.

These contrived arrangements have to be between related parties – that is, companies within a group;

They must create a tax mismatch whereby a group pays less than 80% of the tax that would have been due in the UK without these arrangements;

And the tax benefits created must outweigh any other commercial purpose.

The DPT is not an attempt to tax profits that have been taxed elsewhere – indeed, the design of the tax explicitly precludes double taxation.

It is simply a tax designed to ensure fairness, and one which sends a powerful worldwide signal that we take this seriously – helping us lead the international debate.

Taken as a whole, these reforms have already positive effects.

More inward investment.

More jobs created by that inward investment – twice as many in 2014 as in 2010.

Greater public confidence in the tax system.

A stronger, more open economy.

Benefits to businesses – and to the wider public too.

Our very strong belief is that in the 21st century, countries can only prosper if they are resolutely outward-looking.

We want to open ourselves to business, wherever in the world it comes from.

We want our businesses to succeed, wherever in the world they may be.

As you can tell, we’re ambitious. Our future is global – and so is our outlook. And our door is wide open.

Thank you very much.

Published 29 September 2015