EU will approve reform of business tax regime

The European Commission is expected to approve next Wednesday a corporation tax package negotiated with the Government, under which Ireland will reduce its general level of corporation tax to a common rate for all companies of 12.5 per cent by as early as 2003.

The final strands of the lengthy negotiations with the EU Commission Competition directorate involved agreement on the numbers, and special low-tax treatment, of companies currently "in the pipeline" of confidential talks with the Government about setting up in Ireland between now and 2003.

The Commission has insisted that the different rates of corporation tax in Ireland represented an unfair subsidisation of two sectors of the economy, manufacturing exporters and financial services, contrary to competition rules. The approval of the package will remove that problem, but Commission sources say the Government may face renewed pressures when Ireland's corporate taxation is considered this autumn by the peer review group set up by member-states to monitor unhealthy tax competition between states. Under the terms of the agreement with the Commission, companies already paying 10 per cent tax, either as exporters or IFSC-established, will continue to pay that rate until 2010 and 2005 respectively. And companies currently paying 32 per cent will see their tax rate cut progressively to 12.5 per cent. 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 concentrated on how fast the general rate would come down and how newcomers would be treated.

Sources say that the agreement provides that companies currently "in the pipeline" will be able to avail of the lower rate until 2003. At that stage, they will pay tax at 12.5 per cent.

It is understood the Government has passed to the Commission a confidential list of companies involved in talks about establishing in Ireland and has agreed to a yearly ceiling of 77 new IDA Ireland-assisted exporting companies and 67 new IFSC-based companies for eligibility for the special 10 per cent tax regime to 2003. The figures are close to average recent levels of establishment by international companies in Ireland.

The Commission had been concerned to ensure acceptance of the package by other member-states by being seen to prevent a rush of new companies availing of tax breaks.

Meanwhile, highlighting the dissatisfaction of some other member-states with Ireland's corporation tax regime, the 10 per cent rate was mentioned in a document drawn up by the group looking at harmful tax competition. It was among the regimes across the EU listed as potentially harmful tax measures and discussed at a meeting yesterday by senior EU tax officials. The so-called Code of Conduct group is assessing different tax regimes across Europe to see whether they constitute harmful tax competition. The Code of Conduct Group will meet again in October before reporting to EU finance ministers in December.