Corporation tax to be reduced to 12.5% by 2003

The Government will reduce the general level of corporation tax to 12.5 per cent as early as 2003 as part of a tax deal with the European Commission, the Tanaiste and Minister for Enterprise, Trade and Employment, Ms Harney, said yesterday.

With five budgets between now and then, an annual cut of 4 per cent in the corporation tax rate can be expected.

Ms Harney, in Brussels for a meeting of industry ministers, had a "successful" bilateral meeting with the Competition Commissioner, Mr Karel Van Miert, yesterday morning. She said it brought them close to an agreement on how Ireland would be allowed to maintain its generous tax treatment of exporting manufacturers and IFSC companies, for the next few years.

The low-tax regime is seen by the Government as a key element of its strategy to attract business in future.

Under the terms of the likely breakthrough, companies already benefiting will keep their promised entitlements to the 10 per cent rate until 2010 in the case of exporters, and until 2005 in the case of the IFSC.

The Government will, however, reduce the general level of corporation tax from 32 per cent to 12.5 per cent by the beginning of 2003 and this will become the new common rate for all business.

Still to be finally agreed, however, is how to treat companies which are currently "in the pipeline" in negotiations with the Government to locate in Ireland. The Commission is concerned to prevent a rush of new companies availing of the Irish tax breaks.

The Tanaiste said that agreement was close on a formula which would allow such new companies to enjoy the old rate of 10 per cent until 2003, then 12.5 per cent. that could be done by agreeing with the Commission a confidential list of companies currently negotiating with the Government and by setting an additional ceiling for eligibility based on the average number of companies setting up in Ireland every year at present.

Ms Harney said that on average 75 IDA-assisted companies were being established every year, while the figure for the IFSC was 67.

The Commission has been under pressure from other member states to curb what some see as unfair, predatory company tax competition from Ireland. Although unable to harmonise tax rates throughout the EU because of the requirement for unanimity voting, the Commission has been able to insist under competition rules that tax rates within countries do not discriminate between sectors.

It was able therefore to require the Government to work towards a common internal rate for corporation tax for which it would pay a significant cost in terms of lost revenues. In the negotiations, the Commission quickly accepted the Government argument that companies already established in Ireland had a "legitimate expectation" that the agreed tax regime would be continued for them.

The discussion then revolved around how fast the general rate would come down and how newcomers would be treated.

The "poaching" issue also came up over lunch between ministers when they discussed a paper from Mr Van Miert on industrial relocations within the Union.

While Ireland had faced criticism in Denmark and Belgium over the consolidation of Boston Scientific's research and development in Galway 1,000 jobs were lost in the two countries, with some 200 coming to Ireland the paper argued that relocation was a normal part of business activity between countries and a natural part of the search for efficiencies and competitiveness.

The Tanaiste, welcoming the conclusions of the paper, pointed out that the process "does not involve one-way traffic".

Ireland had lost Semperit, Packard and Digital in Galway. Indeed, she argued, the process went on within the State Coca Cola had relocated from its traditional headquarters in Drogheda to Ballina.

Mr Van Miert argues that the new regulations substantially cutting maximum levels of industrial subsidies from the State known as "regional aids" will substantially reduce the danger of structural funds contributing to such relocations.