The leader in the FT today on the Pfizer bid for AstraZeneca has thrown up on of those amazing examples of corporate-finance jargon:

‘Re-domiciling for tax purposes’ or ‘tax inversion’ for short.

What’s ‘re-domiciling for tax purposes’ when it’s at home?

Essentially a company changes the location of its official corporate headquarters to lower its tax bill.

(It’s the corporate equivalent of parents’ renting a small flat in the catchment area of a particularly good primary school).

I’m not going to go into the merits of the Pfizer bid. Don’t know enough about it to comment intelligently.

But what it did make me think of is the design of the tax system and where the incentives from the bulk of the recent tax changes.

In particular the 8 percentage point cut to the headline rate of corporate tax and the new patent box will be eye-catching changes for any corporate looking to reduce their cash tax costs.

But these tax changes are the type that are more likely to incentivise corporate inversions.

With the recovery in 2012 and 2013 being driven by consumer spending and net lending to business still falling, the UK needs tax reforms that incentivise investment.

And to the Government’s credit, we’ve seen some of that, but only to a degree:

  • The above the line reform to R&D was very valuable in terms of simplifying the system (but the large companies rate of relief is still a fraction of what is available in other countries)
  • The small companies’ R&D tax credit was raised to just uneer 35% for loss making companies
  • Raising the Annual Investment Allowance to £500k until the end of 2015 will free up cash flow (but is only temporary and is a patch on the cut to the main rate of capital allowances).
  • The UK is still the only country in the OECD and G20 that provides no general recognition of investment in modern manufacturing investment.

So while the general sense amongst businesses I speak with is that the UK’s tax system is becoming more globally competitive. So this isn’t a plea to unpick any progress made on the headline rate or the patent box.

Rather, it’s a plea to think about the composition of tax reforms and the balance of incentives they provide.

Right now, it seems like we need more incentives to invest, not more incentives to invert.