The current state of play on Northern Ireland’s demand for a corporation tax cut seems to be that it cannot happen because of the European Court’s Azores ruling.
However, there is an argument that the ruling actually protects the right of regional governments to set differential tax rates under certain circumstances.
The court has upheld the three tests postulated by the advocate
general in order to evaluate whether a regional tax regime is truly
autonomous: institutional, procedural and economic autonomy. This means
that the regional tax regime must be approved by a public body with a
considerable degree of autonomy and without the interference of the
central government in the approval process and that its financial
impact must be borne by the autonomous government, without compensation
from the state authorities.
In short, the region must both have the power to adopt the specific regional tax measures and bear their cost. (International Tax Review)
The courts ruling appears to be in line with the principles of ‘fiscal federalism’ as put forward by the Scottish Liberal Democrats’ Steel Commission:
The Scottish Government should raise as much as practical of its own spending.
No Parliament should expect to be funded predominantly through grants determined by another Parliament, nor should it be responsible for massive public expenditure without any responsibility for raising revenue in a manner accountable to its electorate. It is desirable to have better aligned financial authority and accountability, with each level of government raising as much as practical of its own spending.
Even the Northern Ireland Assembly appears to have been aware of the Azores ruling requirements when it called for a corporation tax cut. Economic advisor Mike Smyth covered the issue at the last meeting of the Assembly subgroup on the Economic Challenges Facing Northern Ireland:
The Azores case, which I have read several times,
points up three qualifying conditions that Northern Ireland must meet.
If Northern Ireland meets those three conditions, it is my
understanding that a corporation-tax rate in Northern Ireland that is
lower than the UK average would not contravene EU state aid rules.
first condition is that Northern Ireland must be politically and
administratively autonomous within the UK, which means that there
should be a devolved Government in place. The second condition is that
the Northern Ireland Government must unilaterally decide to introduce
the differential corporation-tax regime, without reference to central
Government. That means that the devolved Government should have
tax-varying powers. The third condition is that any tax revenue
shortfall, resulting from the corporation-tax derogation, should not be
made up by a fiscal transfer or grant from the national Government, but
from within the existing fiscal arrangements. Northern Ireland would,
therefore, have to take the hit and make up the tax shortfall from
within its own public expenditure resources. Those are facts, and I am
giving no views on them. (Northern Ireland Assembly)
The Committee went on to call for a corporation tax cut in its report, although whether it accepted the implications under the Azores ruling is not clear. The report is not available online, but I will try to get hold of a copy.
29 March: Northern Ireland’s changing terms of trade
17 April: UUP backs SNP on tax
15 October: Will Brown give Northern Ireland a Corporation Tax cut?
24 October: More on the Northern Ireland corporation tax debate
27 October: All-island economy study launched
30 October: Observer: Brown to block Northern Ireland tax cut
2 November: Brown meeting: No tax deal for Northern Ireland