• Rate to be reduced to 17 percent by 2020 from 20 percent now
  • U.K. rate lowest among developed countries after Ireland

Chancellor of the Exchequer George Osborne’s decision to cut corporation tax to 17 percent by 2020 will bring the U.K. rate to the second lowest among developed countries.

Only Ireland has a lower corporation tax rate -- 12.5 percent -- among the 34 members of the Organization for Economic Cooperation and Development.

Corporation tax is "one of the most distortive and unproductive taxes there is," Osborne said Wednesday in announcing the U.K. budget in the House of Commons. He said the reduction would benefit more than one million companies, large and small. Business groups welcomed the move.

The tax cut "sends a strong signal to the world that the U.K. is the number one destination" for multinational firms, said Mark Boleat, policy chairman at the City of London Corporation, the local government body that runs London’s financial district.

After taking office in 2010, Osborne cut corporation tax from 28 percent to 20 percent, making it the lowest rate in the G20. Last year he announced plans to drop the rate to 19 percent in 2017 and 18 percent in 2020.

Today’s announcement to lower it even further to 17 percent by 2020 puts the U.K. rate at less than half the U.S., where the corporate tax rate is 39 percent, according to the OECD. Other EU countries have much higher rates, including France at 34 percent and Germany at 30 percent, according to the OECD.

"Britain is blazing a trail," Osborne said. "Let the rest of the world catch up."

Tax Avoidance

The corporation tax reductions announced since 2010 will be worth almost £15 billion ($21.1 billion) a year to business by 2021, according to the U.K. budget announcement.

Osborne emphasized measures that would crack down on tax avoidance by large companies using complex structures. Altogether, Osborne said the reforms would raise 9 billion pounds in extra revenue and will be used to pay the cost of the lower business rate. The move could raise money from global corporations such as Amazon.com Inc. and Google parent Alphabet Inc., which have been at the center of tax disputes with the government, in order to reduce rates for small businesses.

"Our policy is to lower taxes on businesses," Osborne said. "Everything we collect from the largest firms that currently pay no tax will be used to help millions of firms who pay their fair share."

In addition to cutting corporation tax, Osborne announced plans to cut the capital gains tax rate from 28 percent to 20 percent. For basic rate taxpayers, capital gains will be reduced from 18 percent to just 10 percent.

"Our capital gains tax is now one of the highest in the developed world,” Osborne said. "We want our taxes to be among the lowest."

Small and medium-sized companies "will welcome measures including more relief on business rates and cuts to capital gains tax, and a further corporation tax reduction coming in a few years,” said Simon Walker, director general of the Institute of Directors.

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