Succeeding in unchartered waters

32 Pages·2017·0.54 MB·English

Succeeding in
uncharted waters
Assessing the competitiveness of the UK
“Overall, this year’s study demonstrates that
businesses continue to see the UK as an
attractive place to do business. The material
change, however, is that fnance executives are
now grappling with the question of how Brexit
might impact current and future investment.
The challenge for the UK Government during
the next two years will be to avoid the trap of
inertia during exit negotiations and to recognise
there are still levers that can be pulled to help
ensure the UK retains its appeal.”
Robin Walduck
Partner and Head of International Tax
KPMG in the UK
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent
member frms affliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved.
Table of
contents
Executive summary 2

1. Key drivers of location decisions and tax competitiveness 4

2. UK’s appeal as a tax and investment destination falls versus

international peers 9

3. Brexit: a potential drag on UK growth 14

4. Promoting growth in the UK: perspectives for the

UK Government to consider 19

5. Conclusion 27

Project participants and approach 28

1
Executive
summary
2016 has to be one of the most interesting years in Whereas UK companies remain broadly confdent about
recent times. Buffeted by a unique set of domestic, the UK’s future attractiveness, non-UK businesses are
political and international economic pressures over the now markedly more bearish. This is due to heightened
past 12 months, UK businesses now face a period of fux concerns over disruptions in trade deals and tariffs,
and uncertainty as the Government resets the country’s an end to the UK’s access to the single market, and
future on the global stage. the mobility of skilled labour. As a consequence, the
picture this year is far more mixed and has meant the
Despite possible turbulence ahead, as we enter exit
UK has lost ground in KPMG’s assessment of both
negotiations, it’s still, in some respects, business as
tax competitiveness and its appeal as a destination for
usual, a sentiment refected in KPMG’s annual research
Foreign Direct Investment (FDI).
into the competitiveness of the UK tax regime.
On the one hand, it is reassuring to note that few
Our 2016 study shows that UK and other G7 companies
companies are planning to withdraw their entire
are continuing to assess where to locate their business
operations from the UK as more pessimistic Brexit
activities and investments in exactly the same way as
commentators feared. In fact the number of companies
they have in previous years. In other words, they are
considering taking business functions out of the UK is
making these judgments based on a consistent set of
broadly unchanged from recent years. This suggests
factors: a country’s political and economic stability, its
most are adopting a ‘wait and see’ approach to Brexit -
market size and the cost and availability of its skilled
postponing many location and investment decisions until
labour force. Likewise, national tax regimes still exert
more details of the UK’s post-Brexit trade and regulatory
a strong infuence on where companies place their
systems emerge.
business functions.
On the other hand, tax executives’ report that the
potential disruption of leaving the EU and ambiguity
Evaluating UK prospects over the UK’s future economic prospects now weigh
heavily on their minds. This has resulted in companies’
In the 11 years we have conducted this annual study,
estimating that Brexit could ultimately lead to
the top concerns of tax and fnance professionals have
substantial reductions in investment and high-value
consistently included levels of stability, change and
activities, such as capital expenditure, employment and
complexity in both the UK and global economies. The
R&D investment.
main issue companies are now grappling with is: ‘how
should Brexit affect our current and potential future In addition, the proportion of both UK and non-UK
investments and high-value activities in the UK?’ In this, respondents looking to move business functions into
the frst detailed study since the EU referendum, we can the UK dropped considerably in 2016. This means
see substantial differences emerging between how UK that, overall, companies report possible net outfows of
company tax and fnance executives view the challenges most business functions this year, reversing the overall
ahead, compared to their G7 peers. position reported in 2015.
© 2017 KPMG LLP, a UK limited liability partnership and a member �rm of the KPMG network of independent
member �rms af�liated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved.
Our study suggests that G7 companies expect
the UK can remain a top investment destination
despite the turbulent times ahead
Positive steps forward That’s not all. Companies list a number of other priorities
to boost UK investment and activities, including
And yet, despite the present – and potential – disruption
investment in infrastructure – particularly regional
that Brexit represents, there are also more positive
transport links and broadband networks – and developing
messages from business in terms of the UK’s future
workplace skills. They also believe that the creation of
as a leading destination for business investment. Many
enterprise zones (with preferential tax rates, planning
companies we spoke intend to stay and propose a
rules and other fnancial benefts) would have a huge
number of constructive measures the UK Government
impact in encouraging FDI in the UK.
could take, in order to bolster the UK’s appeal to
companies both at home and abroad. Brexit is unquestionably a pivotal decision for the UK with
the long and medium term outcomes of leaving the EU
Managing change and complexity are top priorities ranging from the challenging to the potentially positive.
on business agendas. In that light, tax executives The fnal Brexit framework is not yet known and may
consistently call for simplifcation of the UK tax regime, not be clear for many months. The challenge for the UK
as well as support to help companies manage its current Government during the next two years will be to avoid
complexity. Implementing current plans to drop tax the trap of inertia during negotiations and to recognise
rates to 17% is one highly popular measure: companies that there is still much that can be done to promote and
believe this could achieve material increases to capital enhance the UK as an attractive place for both domestic
expenditure, employment and R&D investments. and foreign investment.
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent
member frms affliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved. Succeeding in unchartered waters - March 2017 3
01
Key drivers of location
decisions and tax
competitiveness are
broadly stable in 2016
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent
member frms affliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved.
Non-tax issues: ‘Skilled labour’ drives decisions to more than one-ffth of companies. These same three
relocate business functions, and to retain them in elements also dominate companies’ responses when
the UK asked what factors infuence their decisions to retain
business functions in the UK (Figure 1).
In spite of the many political and economic changes
faced in 2016, the top fve factors that infuence where
While companies hold broadly consistent views on the
companies choose to locate their business functions are
most important factors infuencing location and retention
consistent with those identifed in 2015.
decisions, there exists some variation between the
industry sectors examined. For example, ‘passporting
This year, the ‘availability and cost of skilled labour’ is of
rights’ is regarded as being crucial for Financial Services
particular importance to companies, with half of those
interviewed selecting this as one of the top three factors / Insurance frms, with almost half of this cohort
they consider when choosing where to locate business selecting it as a top-three factor they consider. Similarly,
functions. This was particularly important for those ‘regulatory scrutiny’ stands out as a key concern for
operating in the media/entertainment, business services, both Financial Services and Energy & Natural resources
technology, pharma and engineering/construction organisations, with around one-third of each group
sectors. ‘Market size’, ‘macro-economic stability’ and indicating that this is among their top three concerns
‘political stability’ also infuence location decisions for when making location decisions.
Figure 1: Factors that infuence location of business functions and retention of functions in the UK
Factors influencing location of business functions Factors influencing retention of functions in the UK
50% Availability and cost of skilled labour
45%
46% Market size
37%
29% Macro-economic stability
23%
26% Political stability
22%
21% Access to infrastructure
18%
16% Favourable tariffs and trade deals
14%
14% Level of regulatory scrutiny
13%
14% Access to a single market
15%
(e.g. the EU, GCC, etc.)
13% Foreign Exchange volatility
15%
10% Transportation costs
10%
8% Quality of life
6%
7% Passporting rights
6%
6% Availability and cost of unskilled labour
6%
Figure 1: Figure 1:
Looking beyond the tax regime of a country, which three of Thinking about your business functions currently
the following factors are the most important to your company located in the UK, which three of the following factors
when it chooses where to locate its business functions? are the most important when deciding whether to
Base size: All respondents (160) continue to locate business functions in the UK?
Base size: All respondents (160)
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent
member frms affliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved. Succeeding in unchartered waters - March 2017 5
Figure 2: Difference between UK and Non-UK company priorities for retaining business functions in the UK
Non-UK Companies UK Companies
Availability and cost of skilled labour 27% 56%
Market size 33% 39%
Macro-economic stability 13% 29%
Political stability 25% 20%
Access to infrastructure 27%
Foreign Exchange volatility 18% 13%
Access to a single market (e.g. the EU, GCC, etc) 25% 9%
Favourable tariffs and trade deals 22% 10%
Level of regulatory scrutiny 8% 16%
Transportation costs 5% 13%
Quality of life 5% 6%
Passporting rights 3% 8%
Availability and cost of unskilled labour 3% 8%
Figure 2:
Thinking about your business functions currently located in the UK, which three of the following factors are the most important when deciding
whether to continue to locate business functions in the UK?
Base size: UK companies (100); Non-UK Companies (60)
Gaps emerging between UK and non-UK company Brexit has the potential to dent the UK’s key
priorities regarding location decisions strengths in the eyes of UK and international
companies
There are also marked differences between what UK and
G7 companies regard as the key factors infuencing the While the terms of the UK’s departure from the EU are
yet to be defned, this study highlights the perceived
retention of business functions in the UK (Figure 2). Non-
benefts of doing business in the UK that both domestic
UK companies clearly demonstrate greater sensitivity
and other G7 companies wish to see preserved or
than their UK counterparts to two characteristics that
enhanced following Brexit. In 2015’s study, UK and
impact upon international trade, namely ‘favourable tariffs
international companies identifed the top strengths of
and trade deals’ and ‘access to a single market’ - two
the UK versus its international competitors; ‘political
key aspects that will also feature prominently in the UK’s
stability’, ‘availability and cost of skilled labour’ and
upcoming Brexit negotiations.
‘access to a single market’ all featured in the
UK companies however show a greater sensitivity top-fve (Figure 3).
to the ‘availability and cost of skilled labour’, which
This sentiment was repeated in this year’s survey, albeit
appears to indicate a very real concern by UK business
through a Brexit lens. When the survey was undertaken,
of the adverse effect that could arise should the Brexit
46% of UK respondents and 41% of non-UK respondents
negotiations result in harsh controls over immigration.
identifed their preferred Brexit scenario as being the
UK companies are also signifcantly concerned about UK joining the EEA, retaining full access to the Single
‘access to infrastructure’ than their non-UK Market and accepting the free movement of people. The
counterparts, a fnding which is explored in more second most popular Brexit scenario, and the favoured
detail later in this document. scenario for the Financial Services and Industrial Products
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent
member frms affliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved.
Figure 3: Top fve strengths of the UK versus international competitors in 2015
Political stability
53%
Availability and cost of skilled labour 42%
Macro-economic stability 41%
Access to a single market (e.g. the EU, GCC, etc.) 28%
Market size 26%
Figure 3:
2015 data: Which three of these factors do you see as particular strengths of the UK versus its international competitors?
Base size: all respondents (167)
markets, was for the UK Parliament disruption, and preserve the benefts regime correlate strongly with its
to vote not to trigger Brexit, severely of single market access, these will attractiveness as a destination for
delaying or preventing Brexit from serve to reassure companies across FDI. Mirroring the sentiment seen
taking effect. It is now clear that the G7 of the UK’s strength as a in previous years, two-thirds of UK
these scenarios are no longer viable destination for business (see section tax and fnance executives indicate
options. However, what these 4: Promoting growth in the UK: that tax regimes infuence business
responses do demonstrate is the perspectives for the UK Government location decisions (Figure 4). For the
desire from business for minimal to consider). executives of non-UK companies,
disruption on exiting the EU, and the proportion rises to 74%. These
for continued efforts to maintain a fgures would suggest that steps to
Tax deep-dive: competitive tax
competitive tax system. improve the attractiveness of the
regimes continue to infuence
UK tax regime could also positively
Therefore wherever steps can be business location decisions
impact FDI in the UK. But what are
taken to protect, or indeed improve,
Our research in recent years has the specifc aspects of a country’s
companies’ access to skilled labour,
shown that perceptions of the tax regime that determine its appeal
minimise political and economic
competitiveness of a country’s tax to potential investors?
Figure 4: The infuence of tax attractiveness on decision of where to locate business activities
(% UK companies)
High/Some Influence No Influence
80%
70%
60%
66% 79% 72% 77% 65% 66% 71% 65%
50%
40%
30%
20%
32% 21% 28% 23% 35% 33% 29% 35%
10%
0%
2008 2009 2011 2012 2013 2014 2015 2016 2008 2009 2011 2012 2013 2014 2015 2016
Figure 4:

To what extent does the attractiveness of a country’s tax regime have an infuence on where your company locates its activities?

Base size: UK companies (100)

7
Long-term stability, predictability and low tax rates governments is clear: keep disruption to a minimum and,
are the troika that drives the appeal of national tax where it is unavoidable, make sure you give companies
regimes plenty of warning.
Over the last decade, tax and fnancial executives have
This year, ‘low effective tax rate’ has risen up the agenda
consistently promoted long-term stability as the key
for tax and fnance executives from fourth position in
to ensuring the competitiveness of a tax regime. This
year, executives add to this by selecting ‘predictability 2015 to the third most important factor determining the
of actions taken by tax authorities’ as the second most appeal of a country’s tax regime (Figure 5). With this in
important factor they consider. When coupled with two mind, the UK Government’s plans to reduce corporate
other dominant aspects considered - ‘simplicity’ and tax rates to 17% in 2020 should continue to enhance the
‘advanced warning of major changes’ - the advice to competitiveness of the UK.
Figure 5: Factors that infuence the perceived benefts of a country’s tax regime (% UK companies)
100%
80%
60%
40%
20%
41% 45% 48% 72% 32%75%21 % 28%77%23% 35% 833%3% 29% 8825%%
0%
Personal tax regime Availability of Taxation of Simplicity Advance warning Low effective Predictability of Stability over
advance tax foreign profits of major changes tax rate actions taken by the years
rulings (CFC regime) tax authorities
Figure 5:
Thinking about the factors that may be important when assessing the benefts of a particular country’s tax system, which of the following
factors are important to your company?
Base size: UK companies (100)
The UK Government’s plans
to reduce corporate tax
rates to 17% in 2020 should
continue to enhance the
competitiveness of the UK
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent
member frms affliated with KPMG International (“KPMG International”), a Swiss entity. All rights reserved.