Economist Amit Kara says jurisdictions such as the UK are under pressure to lower corporation tax and shift the burden to small firms, writes Colm Keena

INTERNATIONAL TAX competition and the policies being pursued by countries such as the Republic are "eroding governments' ability to tax" multinational operations, according to a UK economist.

Amit Kara, UK economist for investment bank UBS, told The Irish Times he believed companies which were more "fleet of foot" would move to lower tax jurisdictions such as the Republic.

That, in turn, shifted the tax burden on to domestic, smaller UK companies and individuals, as the government still needed to raise taxes, he said. "The pressure will remain on countries such as the UK to continue lowering corporation tax, especially for the fleet-footed. The tax burden may shift to smaller companies."

The recent decisions of pharmaceutical group Shire and publisher United Business Media to shift their locations to the Republic have added to the pressure on the UK government to reduce its corporation tax rate.

The US government is also feeling the pressure as more of its multinationals decide to move headquarters for tax reasons.

In a recent paper on headquarter relocations and international taxation, Johannes Voget, of the Oxford University Centre for Business Taxation, said a survey he conducted found that 6 per cent of multinationals had shifted headquarters to another jurisdiction between 1997 and 2007.

"With such a turnover, countries have an incentive to present themselves as attractive headquarter locations given that hosting headquarters has certain positive externalities like an increased demand for skilled labour or a larger tax base."

In such a context, it was not surprising, he said, that the UK was considering making foreign dividends exempt from taxation or that the US was giving tax "vacations" for repatriated profits.

He said he believed that in time the US would make foreign dividends completely exempt from taxation.

This week the charity and advocacy group Christian Aid criticised the Irish and UK governments for what it said was their role in assisting multinationals in avoiding or evading paying tax in developing countries.

Facilitating multinationals in exporting profits back to the Republic, where they can be taxed at a lower rate, was not consistent with the Government's policy on increasing development aid, it said.

Christian Aid said that, globally, the amount of tax being relocated from the developing world to multinational headquarters located in low-tax jurisdictions in the developed world exceeded the amount of development aid being given to developing countries.

However, Mr Kara said he did not believe much could be done to counter the way multinationals were profiting from intergovernment tax competition.

"It's hard to lean against the general trend and I can't see the trend shifting unless there is a collective agreement between governments, and I don't see that."

He said any move by the UK to join an agreement on tax between the EU member-states would create political difficulties as it would be seen as a loss of sovereignty. "I don't see how that would be politically acceptable," he said, adding that he still saw "downward pressure" on taxation.

On the issue of whether the Republic could maintain its low tax regime in the face of pressure from EU partners, Mr Kara said: "My feeling is that Ireland will be able to. If it stops, then someone else will step into the vacancy."

In more recent times multinationals have been locating their profits in low-tax locations such as the Republic by having their intellectual property located there.

Companies based in low-cost jurisdictions can then charge their subsidiaries in other countries for the use of the intellectual property, so that the multinationals' profits end up being made in the low-tax jurisdiction. Technology and pharmaceutical companies in particular have been pursuing this strategy.

Because low-tax jurisdictions tend to have relatively small populations, one of the consequences of this trend is that profits from populous countries such as France and Germany are being shifted to less populous countries such as the Republic, where they are taxed.