EU steps up pressure on preferential company tax

The tougher approach taken recently by the European Commissioner for Competition, Mr Karel van Miert, to special fiscal regimes in the member states such as the IFSC has been endorsed by the full Commission. Mr van Miert won backing yesterday from the Commission, meeting in Strasbourg, for a paper which describes what he sees as his mandate both to crack down on new preferential company tax regimes - whether sectoral or geographical - which distort competition and to reopen examination of regimes already approved by the Commission.

The paper, which does not mention any country's tax breaks specifically, will form the basis of a later formal communication to member states. Its purpose, the Commission says, is to "assure coherence and equality of treatment" of member states when they use fiscal measures as state aids.

It will scarcely come as a surprise to Irish officials currently involved in negotiations over the future of the manufacturing exporters, the IFSC, and the Shannon tax regimes who are well aware of Mr van Miert's view that the evolution of competition case law and a hardening of member states attitudes allow him to expand his definition of regimes requiring approval.

Although the Government recognises the legal competence of Mr van Miert in relation to the IFSC and Shannon regimes it has disputed the contention from the Commission that the older tax break for manufacturing exports is a state aid - in Dublin's view it is a "general" tax measure over which the Commission has no say.

In his paper Mr van Miert makes it clear that he believes there is legal backing for the view that even discrimination in favour of companies in an entire sector of the economy, such manufacturing as a whole, is a form of state aid and, therefore, subject to his supervision.

It justifies the Commission's right to review regimes which have already been approved or to reconsider whether other regimes should have been subject to approval "in light of the evolution of the situation and of the Commission's policy". The latter has also provoked the Irish Government to complain that the Commission is creating uncertainty for business by changing the ground rules. While the paper will be useful to member states as a clear statement of the Commission's wide interpretation of fiscal state aids, they need not necessarily accept those interpretations which can still be challenged in the European Court.

More likely, as the Irish are doing at present, they will seek to negotiate a pragmatic solution with Mr van Miert which, while not recognising his full authority or the full logic of his approach, goes some way to meeting his concerns. That is the way Brussels works.