Why lowering corporation tax could spur financial services job creation in Scotland

Over the last week, much of the focus on the prospect of cutting Scotland's corporate tax rate to 12.5% has been negative. However, the move could also have the knock on effect of significantly bolstering financial services job creation north of the border.

HM Revenue & Customs has calculated that a 12.5% corporation tax rate would mean Scotland has a budget shortfall of anything between 500m-2.6bn a year.

While opposition parties in Scotland have damned the move for its negative impact on public services, local businessmen have made the case for cutting the corporation tax.

Looking at Ireland as a case in point, which has long had a 12.5% corporate tax rate, it's easy to see why. This has been a perennial carrot for attracting inward investment into the country. From a financial services perspective, it's also been instrumental in attracting thousands of jobs.

International financial services firms in Ireland now account for 36% of total corporate tax receipts in the country, according to a recent report by Accenture, and there are 500 companies based in Ireland's International Financial Services Centre.

The IFSC now employs nearly 33,000 people and there are plans by the Irish government to create 10,000 more over the next five years.

Obviously, the corporate tax rate has also encouraged inward investment from other industries, hence Ireland's ongoing fight to keep corporate tax at 12.5% despite pressure in the wake of its €67bn IMF/EU bailout last year.

"In theory, a 12.5% corporate tax rate could encourage more foreign direct investment in Scotland, and therefore create more financial services jobs here," says Rhona Irving, tax partner at PwC Scotland. "But we're still a long way from this happening, with a lot of practicalities that still need to be ironed out."

Scotland has already been benefitting from its relatively low cost status. Investment banks have relocated back office functions to both Glasgow and Edinburgh in recent years and retail banks and insurers have created hundreds of call centre roles north of the border.

"There's been a massive movement of back office roles into Scotland and any reduction in corporation tax, whether to 12.5% or the 23% planned in the UK by 2014, would encourage more of this," adds Irving.