The reduction has been agreed with the Liberal Democrats and has been added to the final coalition agreement.
National Irish Bank economist Ronnie O’Toole warned that the competitive advantage enjoyed by Ireland with its low 12.5% rate will be eroded over time as competition for inward investment heats up.
It will take time for Britain to get down to our level, but it will happen and other European countries will follow suit, he warned.
It was difficult to say how big an impact the changes will have in the short term until Chancellor George Osborne sets out his plans in his forthcoming budget.
Mr O’Toole also said several factors motivate multinational firms to locate where they do, not just taxes. In his experience, US multinationals located in Ireland “are no more likely or no more less likely to move (out of ireland) than if they were in another US state”. He said he is “confident” Ireland would continue to punch above its weight in attracting FDI to its shores in the years ahead.
During the British election campaign, the Conservatives pledged to cut the main rate of corporation tax to 25% from 28% and the small-company rate to 20%.
Britain’s main corporation tax rate compares with rates last year as high as 39% in the US, 34% in France and 30% in Germany, according to the Organisation for Economic Cooperation and Development.
At 20%, Turkey has among the lowest rates in the Group of 20.
In a speech at the CBI annual dinner, Mr Osborne said: “I want corporate tax reform to be a priority for this government. And I can confirm that the final coalition agreement will commit us to lower and simpler corporate tax rates.”
The purpose of the changes would be to attract inward investment and not to drive business out of Britain as has been the case.
High taxes will push more companies and high earners abroad. “Britain is once again open for business.... I want multinationals coming to the UK, not leaving,” Mr Osborne said.
Ernst & Young Northern Ireland’ Michael Hall said he was heartened to “see that the pledge made in the Conservative party’s manifesto to examine potential mechanisms for changing Northern Ireland’s corporation tax, remains in the coalitions Programme for Government”.