UK unlikely to become tax heaven
Pascal Saint-Amans said UK might be able to reduce tax rates too lowerGetty Images

The head of tax at the Organisation for Economic Co-operation and Development (OECD) said UK could use its freedom from the European Union rules to reduce corporate tax although the political price would remain high.

The idea of slashing corporate tax on multinational companies has been raised by some accountants and policy experts, as the country voted to leave the EU. The move could help firms to avoid tax on the profit they make in other countries in the EU.

"The negative impact of the Brexit on UK competitiveness may push the UK to be even more aggressive in its tax offer," said Pascal Saint-Amans, the OECD's head of tax, in the memo. Reuters claims to have access to the memo prepared by OECD, the body responsible for drafting international tax rules

"A further step in that direction would really turn the UK into a tax haven type of economy," he added.

UK is already working on reducing its corporate tax by 17%. The country has also introduced tax breaks allowing companies to pay lower tax rates on income tax and no tax on earnings from the tax heavens. The OECD said, UK would need to cut its tax rate or even introduce a system of generous tax ruling.

The European Commission is meanwhile going hard against countries like Ireland and Luxembourg for allegedly providing companies like Apple and McDonalds with suitable tax deals and thereby allow them to shift profits from other EU countries.

"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," notes a memo written by Saint-Amans. He also mentioned UK might not be able to afford to cut tax too much due to the pressure on public finances, "which may only increase with the negative impact of the Brexit on UK growth."

The OECD further highlighted an area where UK would be able to become more competitive. The VAT memo said UK could take a different approach for VAT.

"It might now consider reviewing its domestic rules to remove the VAT burden on its financial services industry, which would create a major competitive advantage for the City compared to other financial centres in the EU," reads the VAT memo.

Leaving the EU would bring new VAT compliance burdens and costs that "will add to the competitive disadvantages for UK businesses trading with the EU compared to their EU competitors," the memo said.