Prolonged talks with EU on cards over corporate tax

The Government is facing prolonged negotiations with the EU Commission over the move to a universal corporation tax rate of 10 or 12.5 per cent and the phased reduction in State job subsidies offered to investors. The Tanaiste, Ms Harney, and the Minister for Finance, Mr McCreevy, met the Competition Commissioner, Mr Karel van Miert, here late yesterday evening, to open negotiations on the two issues. They were later due to meet the Irish Commissioner, Mr Padraig Flynn. The Commission has been concerned for some time that the IFSC and manufacturing exports tax regime is "unfair" tax competition and Mr van Miert is charged with reducing such sectoral subsidies.

His colleague, the Internal Market Commissioner, Mr Mario Monti, is preparing a tax code of conduct that will require harmonisation of corporate taxes within countries.

Last night Mr van Miert was understood to have made clear that he was not concerned about the absolute level of Irish corporation tax. But he wants to see the Government reduce as fast as possible the difference between such special regimes and the general corporation tax regime. Talks between Commission and Irish officials will continue, in an attempt to reach agreement on the speed of such reductions.

This could have implications for future budgets, as the Commission may press the Government to reduce all corporation tax to a single rate over a shorter time period than had been planned. Currently IFSC businesses are offered a tax ceiling of 10 per cent until 2005, while manufacturing exporters enjoy similar benefits until 2010. The last Government announced its intention to extend such rights beyond those dates to at least 2025 at a rate of 12.5 per cent and to progressively cut other corporation taxes to that level. Fianna Fail and the PDs remain committed to a figure of 10 per cent. Mr van Miert is also determined to reduce the high level of Irish job subsidies, so-called "regional aids". He is due to produce a new policy statement for the Commission in November on regional aids and wrote to Ms Harney in July outlining his concerns.

Higher levels of aid are permissible in disadvantaged areas - in Ireland's case the equivalent of up to 55 per cent of capital investments - but Ireland's growth in recent years has pushed it out of this category. One question now for Irish policy-makers will be whether higher state aids can be retained for certain parts of the State, even if inward investment to the wealthier Dublin region is to receive less. The issue is also likely to be examined closely by IDA Ireland in the months ahead as its strategy for spreading multinational investment around the State.

The problem is the same as that for structural funds where the Government has been promised a "soft landing" by the Commission in the post-1999 budget.

Mr van Miert also has to reconsider Ireland's derogation from state aids restrictions under Article 92.3. (a) of the Treaty and his officials will now work on agreement on transitional arrangements to take the Irish regime to the 25 per cent ceiling prevailing in the richer European regions.