EU accord on taxation package benefits Ireland

Ireland's manufacturing and IFSC corporation tax regimes have been copperfastened in an EU Finance Ministers' declaration that accompanied yesterday's early morning breakthrough on a controversial tax package.

The package involves detailed agreement on a controversial directive on the taxation of non-resident savings, a report on the application of the code of conduct on corporate taxation, and a directive on the taxation of cross-Border royalties.

Agreement was reached at 3 a. m. after the Luxembourg Prime Minister, Mr Jean Claude Juncker, accepted that he could put the terms of a deal on the savings directive to his cabinet.

The Minister for Finance, Mr McCreevy, said that there had been some small concern that the code of conduct might be seen as undermining or superceding the agreement reached with the Commission in December 1998 under which Ireland would phase out the special IFSC and manufacturing tax regimes of 10 per cent in favour off a common tax of 12.5 per cent.

Yesterday's declaration by the Commission simply acknowledges that the code will not affect state aids agreements reached with the Competition Directorate. The code, a purely voluntary agreement, seeks to eliminate "unfair tax competition", specifically differing sectoral rates within member states rather than between them.

But the Commission's willingness to facilitate Ireland, left Mr McCreevy no more willing to move on the issue of majority voting on tax, likely to be a central controversy at next week's Nice summit. Although the current Presidency proposal for a treaty change only refers to ending the veto on decisions relating to VAT and excise rates and the fight against fraud, the Minister was adamant that "all areas of taxation are totally linked".

"We have learned from past experience that the Commission would love just to get the foot in the door," he said, insisting "we won't be changing our position in Nice on this. And we are not on our own."

Indeed the British Chancellor, Mr Gordon Brown, boasted that the agreement on the savings directive was proof that unanimity voting worked. Britain had held out for several years against the original form of the directive.

Agreement had been reached in Feira in June on the principle of a common approach to non-resident savings taxation, a major leak in member states' tax base, but Luxembourg, a huge beneficiary of capital flight from countries all around it, had been holding out until now on the detail.

And Mr Juncker still has the option to block implementation at a later stage - the final application of the directive is conditional on acceptable deals being done along similar lines with third countries like Switzerland and Liechtenstein.

Under the directive member states will have a choice for seven years from 2003 whether to apply a minimum withholding tax on non-resident accounts or to pass on information about accounts to the tax authorities of the non-resident.

At the end of the seven years all states will adopt a reporting regime.

For those who opt for a withholding tax it will be set at least 15 per cent for the first three years from 2003, and at least 20 per cent for a further four years. Such payments will not necessarily be regarded as a full settlement of tax liabilities, allowing non-residents' home states to charge them the balance between the minimum withholding rate and the national rate.

Investment funds are also to be covered by the directive and there is a provision allowing "grand-fathering" of bonds, ie. that bonds bought before March 1st, 2001 will not be subject to the directive.

The taxing state will retain 25 per cent of the revenue raised, passing the balance to the non-resident's home state.

Meanwhile Ireland was last night putting up a rearguard defence in the Social Affairs Council against the adoption of a directive on information and consultation of workers. The directive which requires all enterprises employing in excess of 50 people to provide them with advance notice of decisions affecting them, specifically redundancies.

Irish sources say they are not as firmly opposed to the principle of the directive as the British but prefer to see such matters dealt with through our own social dialogue.

The withholding tax has been a contentious issue in states such as the UK and Luxembourg which have substantial flows of foreign funds but will not make any material impact here. According to figures compiled by the Central Bank of Ireland at the end of September, #11.5 billion (£9 billion) of the #108 billion (£85 billion) deposited in Irish institutions is from residents of other EU states. This is primarily held in Irish banks and branches of foreign banks and companies at the International Financial Services Centre.