New swathe of difficulties as Dublin abstains from tax plan

 

ANALYSIS:Ireland is now in the opposite camp to most euro zone countries at a time when Noonan is fighting for debt relief, writes ARTHUR BEESLEY,in Luxembourg

A TOTAL of nine European countries have joined Germany and France in the push for a common European tax on financial transactions.

Dublin will not be participating, but the initiative heralds more discomfort for the Government in its relations with its EU partners. The development could yet have major implications for the defence of Ireland’s corporate tax regime.

The idea behind the tax is simple. With taxpayers throughout Europe supporting stricken banks to the tune of hundreds of billions of euro, the objective is to ensure that a volatile financial system makes a greater contribution to society at large.

Irish banks are the beneficiaries of some €64 billion in capital from the increasingly indebted, cash-strapped State, so many observers might see many good moral and financial reasons for Ireland to take part. That’s not how the Government sees it, however.

Britain is abstaining from the tax. Therefore, Minister for Finance Michael Noonan fears financial institutions would move their business to the City of London from the Irish Financial Services Centre if Ireland joined while Britain stayed out.

Noonan’s overriding concern is to avoid doing anything that would threaten the employment of 33,000 people in the Irish financials sector. Amid soaring unemployment, this is a forceful argument.

The Minister also says Ireland already charges a 1 per cent stamp duty on all share deals, a charge smaller in scope than the proposed European tax because it is levied on transactions in derivatives.

But the plan agreed yesterday still presents a new swathe of complications to the Government. For one thing, it puts Ireland in the opposite camp to most euro zone countries at a time when Noonan is facing acute difficulty in his long campaign for bank debt relief.

This is no small point. In addition to Germany and France, the participants are: Spain, Italy, Austria, Belgium, Slovenia, Greece, Portugal, Estonia and Slovakia. All these countries use the single currency, many are very favourable to Ireland’s demand for debt relief but the most powerful of all – Germany – is sceptical.

To say this is politically inconvenient for Noonan is to put it mildly, although it is noteworthy that “core” euro zone countries such as the Netherlands and Luxembourg are not joining. It is no coincidence that they too operate big-league financial centres.

There is more. The participants will deploy new measures in the Lisbon Treaty which allow a coalition of at least nine countries to proceed with a European legislative initiative even if unanimous support among the 27 EU member states cannot be achieved.

This “enhanced co-operation” procedure has been used twice before: to advance a European patent; and when some member states recognised each other’s divorce law.

The wider significance of the new plan is that it marks the first time that member states will introduce a European tax scheme in the absence of unanimity. In the scheme of things, that is a huge move.

The big issue for Dublin is that the transaction tax via enhanced co-operation may create a precedent for adopting a common business tax system by a group of member states.

Although the Government is pledged to engage constructively in talks on an EU-wide common consolidated corporate tax base (CCCTB), no less a man than Taoiseach Enda Kenny once dismissed the initiative as a “back door” route to tax harmonisation. In a fundamental sense, this is a no-go area for the Government.

The drawback for Ireland if a group of countries push ahead with their own CCCTB is clear. In short, this would dim the lustre of the storied 12.5 per cent corporate tax rate by making it more difficult for global companies to maximise the profit they book in Ireland for tax reasons. Numerous technical questions also arise.

While the nitty-gritty remains to be pinned down, another threshold has been crossed in Europe – this time on taxation.

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