Pressure mounts on Ireland over corporation tax rate

Thu, Jan 19, 2012, 00:00

THE GOVERNMENT is facing a new threat to its corporate tax regime as Germany and France push for the acceleration of moves to create a pan-European business tax system.

The renewed clamour for tax co-ordination is set out in a package of measures to stimulate the European economy, which Germany and France want to discuss at two EU summits in the next six weeks.

The two powers, which dominate Europe’s response to the debt crisis, say in a private submission to European Council president Herman Van Rompuy that urgent measures are required to secure economic growth.

In a paper seen by The Irish Times, they highlight “tax co-ordination” as being among the policies required to bring this about. These include a quickening of moves to create a common consolidated corporate tax base (CCCTB), an initiative once dismissed by Taoiseach Enda Kenny as tax harmonisation by the “back door”.

The CCCTB would not harmonise tax rates but it would create a pan-European tax system for firms operating in more than one country.

The Government fears this would diminish the attraction of the Irish regime by making it more difficult for multinationals to take advantage of the low 12.5 per cent tax rate.

French president Nicolas Sarkozy has major reservations about the Irish policy. With the support of German chancellor Angela Merkel, he repeatedly pressed Mr Kenny last year to dilute the regime in return for an interest rate cut on Ireland’s bailout.

The Taoiseach refused to yield but pledged to constructively engage in talks on draft EU legislation to establish a CCCTB.

This process had been considered likely to run for years, but Germany and France now want to speed it up. “European institutions and member states should accelerate the process of tax co-ordination in order to foster growth, removing obstacles to the functioning of the single market and preventing tax abuse and harmful tax practices,” their paper says.

“In particular, the negotiation of the European Commission proposals on [the] energy tax directive, common consolidated corporate tax base and common system of financial transaction tax should be accelerated.”

This intervention comes at an inopportune time for Mr Kenny as he will need German and French support if he is to make headway in his campaign to reduce the cost of Ireland’s bank debt.

The Government is already resisting German demands for constitutional limits on debt and deficits in Europe’s new fiscal treaty, something that would necessitate another Irish referendum. A referendum may still be required even if Germany relents on this front.

EU leaders aim to reach political agreement on the terms of the treaty at an emergency summit on Monday week. They gather for a second Brussels summit on March 1st.

Finance ministers, who meet next Monday and Tuesday, will pursue the next phase of the talks.

“It’s going to be a long two days,” said Minister for Finance Michael Noonan after meeting his German counterpart, Wolfgang Schäuble, in Berlin. “We won’t know about a referendum until we see the final draft and there isn’t a final draft.”

Dublin was coming around to the view that it could live with a clause requiring any country seeking aid under Europe’s permanent bailout fund to have ratified the treaty, Mr Noonan said.

“Our concern is whether markets would take a view that once the obligation of linkage was there that it might affect our capacity to get back into the markets . . . I’m less worried about it than I was.”

Talks continue today in Athens on a private sector contribution to the second Greek bailout.

To confront the euro zone crisis, the IMF wants to boost its war chest by $600 billion (€467 billion).