George Osborne has been warned against turning the UK into a tax haven in the wake of the Brexit vote by the Organisation for Economic Co-operation and Development.
The chancellor told the Financial Times at the weekend that he wanted to cut corporation tax to 15% – 5% below the current rate – to show that the UK was still "open for business". That would give Britain the lowest corporation tax of any major economy.
But the OECD's head of tax said the move could turn the UK into a tax haven, which could anger other EU countries at a time when negotiations over Brexit take place.
The public could also turn on the government if tax rules are relaxed – after years of uproar over UK tax avoidance by multinational companies including Google, Starbucks, and Amazon.
With the UK outside the EU, the government could also set up so-called “sweetheart” deals with big corporations.
Alleged deals involving Apple and McDonald's, with Luxembourg and Ireland, are currently being scrutinised in EU courts to decide whether they are illegal. All sides deny wrongdoing.
The OECD's Pascal Saint-Amans wrote in the internal memo seen by Reuters:
The negative impact of the Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer.
A further step in that direction would really turn the UK into a tax haven type of economy.
Osborne cited the OECD during the referendum campaign, when it warned the British economy could suffer if the UK voted to exit the EU.
But it is not known whether he will follow its warning on the UK being turned into a tax haven.
Saint-Amans added that there are major barriers to bringing in a lower tax rate – especially if the exit vote leads to a strain on public finances.
The memo appears to have been written on 24 June – the day after the referendum but before Osborne laid out his plans for the tax cut.
Corporation tax is already due to be cut to 17% in the UK, but a cut to 15% would bring it to the lowest level in the G20, the group comprising the 20 biggest economies in the world.
Ireland would still be lower at 12.5% but has suffered heavy criticism for allowing alleged tax avoidance on a massive scale for some of the world’s most profitable companies.
Saint-Amans added: “The mood of the people is certainly not about giving more benefits to large MNEs (multi-national enterprises), making it a hard move to any new government.”
Any move to the UK becoming a tax haven may also fail to have the desired effect of improving the economy, because typically havens are small countries. Any extra jobs created in the UK may be minimal by comparison with the overall population.
Pascal Lamy, former head of the World Trade Organisation, agreed that turning the UK into a tax haven could infuriate the EU countries the UK will start negotiating with.
I'm quite convinced that at the end of the day, if you want a proper balanced win-win relationship in the future, starting with tax competition is not the right way psychologically to prepare this negotiation.
Last week Osborne dropped his third and final economic pledge to get the UK's budget into a surplus by 2020 – warning that the Brexit vote meant it was unlikely to be achieved.