FF plan trumps Government's

WITH the Government shortly expected to announce its intention to aim for a gradual move to a 12.5 per cent rate of corporation tax, the Fianna Fail election manifesto is understood to include a commitment to a 10 per cent rate.

The main opposition party is to pledge that it would introduce a 10 per cent rate for all businesses by 2010 and will argue that the Government's plan to move to a 12.5 per cent rate will put at risk a considerable amount of inward investment.

The Cabinet is expected to finalise plans next week to aim to introduce a standard 12.5 per cent rate on corporation tax profits by 2010. The commitment will be a central part of a new strategy on employment. The document will also cover Government plans for the unemployment, young people and entrepreneurs and will announce the establishment of a new competitiveness council. This council will include representatives of the Government and social partners and, reporting directly to the Taoiseach, will aim to make recommendations to improve Ireland's competitive position.

But the Government plan looks set to face heavy criticism from Fianna Fail. At the moment corporation tax is charged at 10 per cent on manufacturing and internationally traded services and 36 per cent for other businesses. A special 28 per cent rate applies on the first £50,000 of profits. EU approval for the 10 per cent manufacturing rate runs out in 2010, and in 2005 as it applies to companies in the IFSC.

The Government is expected to propose that one 12.5 per cent rate be introduced by 2010.

It favours a higher 25 per cent rate to apply to so called "passive" income - such as interest from investments or rental income.

However it is not clear yet how financial institutions will be taxed, as some levy is likely to be introduced to stop the banks and financial institutions from making a major windfall gain from the tax changes, under which the 36 per cent rate is likely to be reduced by a couple of percentage points every year. Under the Government plan, the Business Expansion Scheme and tax relief of dividend payments are also likely to be abolished.

The Minister for Finance, Mr Quinn, is expected to brief the EU Commission on the plan early next week in a bid to ensure that Brussels does not raise any obstacles.

But The Irish Times has learned that the Fianna Fail election manifesto will propose that a 10 per cent rate be introduced and that the main opposition party believes that a higher rate would risk losing investment projects because it would substantially increase the tax charge on multinationals here.

Fianna Fail is also to propose the earlier introduction of new special tax regime, aimed at encouraging smaller business.

It is also to propose the introduction of a PAYE allowance for company directors.

Meanwhile writing in today's Irish Times, the director of the IBEC federation which represents the main pharmaceutical and chemical companies here argues that the 10 per cent rate should be extended beyond 2010.

Even the introduction of a 12.5 per cent would mean a 25 per cent rise in taxes, he said, and would mean that investment would be lose to Ireland. However the Government is expected to argue strongly that the 12.5 per cent rate will still prove an attractive incentive.