Nice Treaty puts the spotlight on taxing issues

Peter Sutherland told the "IFSC for Yes" group that a rejection of Nicewould damage Ireland's position at the EU negotiating table which couldeffect our input on deciding tax issues, writes Una McCaffrey

Speaking in Dublin at the end of last week, respected former EU Commissioner Mr Peter Sutherland, presented the Irish electorate with a stark choice. Either we could vote Yes in the forthcoming referendum on the Nice Treaty and retain our "good standing" at the EU table of power, or we could vote No, thus choosing to become a kind of Skibbereen Eagle left "bleating our views into the Atlantic".

The latter analogy, comparing the Republic to the ineffectual Cork newspaper that once chastised the mighty Russian Czar, was a cleverly-chosen one, its significance heightened by the presence of the Minister for Finance, Mr McCreevy, who duly agreed with the sentiment.

The two men were addressing the flagship meeting of the "IFSC for Yes" group, a collection of senior financial services professionals who have come together, under the guidance of an adviser in the Tánaiste's office, to campaign for a positive outcome in the forthcoming referendum.

The meeting was held in the heart of the IFSC itself, against the backdrop of what must be the Republic's most impressive and bustling office development.

It was hard to avoid the significance of pushing for a Yes vote in such a environment that is, despite its obvious and consistent success, so sensitive to the mood of the EU powers that be.

In particular, the IFSC is a hostage to EU taxation policy.

Tax harmonisation and its prospects, long one of the bugbears of intra-State negotiations at EU level, is a topic with which IFSC professionals are intimately familiar. The forthcoming Nice referendum simply represents the latest stage in an ongoing saga, with one side claiming that the Republic's favourable corporation tax regime is once again under threat, and the other trying to quietly get the Nice referendum ratified so that the whole issue can go into hibernation for another while at least.

The debate began in 1987, when the IFSC was, in a great political coup, accorded a special tax status which allowed companies operating there to pay a corporation tax of just 10 per cent, as opposed to the rate approaching 50 per cent which applied to other Irish companies at the time.

International financial houses, led by the prominent domestic banks, began to pour in almost immediately to take advantage of the lucrative tax situation, locating a range of insurance, banking funds and ancillary operation in the under-populated area behind Dublin's Custom House. The result, 15 years later, is that 11,000 people work in a financial services industry that developed from a standing start on what was once a waste-ground on the poorer side of a less-than-prosperous capital city.

The effort to maintain the taxation conditions allowing for this employment has not always come easy, however, with many battles on the issue occurring at EU level, as other states in the Union jealously eyed the multi-million euro industry housed by one of their smallest neighbours. The most significant fight came in 1998, when the Irish Government came under massive pressure to eliminate the special 10 per cent rate because, among other things, it was being viewed as an unjust state aid.

In political coup mark two, the Irish Government took its opponents by surprise for a second time, proclaiming that instead of saying goodbye to the IFSC's low rate of tax, it would introduce a similarly low rate on all corporate profits, no matter which industry produced them. Thus we arrived at the current state of play, where the Republic prepares to adopt a 12.5 per cent rate for all companies from the start of next year.

Rather than threatening the very existence of the IFSC, this actually allows it to be extended beyond the parameters of the docklands and into regional locations. Under the terms of the deal between the EU and the Government, companies already in the IFSC in 1998 were to keep their low tax until 2005. In the case of certain manufacturers who also qualify for 10 per cent, the time limit was extended until 2010.

Unfortunately, the issue of opposition from EU partners has refused to go away in the intervening period, with the question of tax harmonisation across the Union periodically raising its head, usually on the insistence of the German administration.

When the Treaty of Nice was under negotiation, the issue once again came to prominence, with some states, notably Germany, calling for the voting system applying to tax policy to be changed. If this had occurred, tax would have changed from an issue requiring unanimous agreement to one where change could be voted through simply by qualified majority. By definition, this would put the IFSC, and the special 10 per cent under serious competitive threat.

In the event, the moment passed with the Republic and the UK both sticking their heels in and ensuring that the veto was retained. The concession to the other side of the argument was a provision in the Treaty whereby, in theory, eight states could band together (an idea often referred to as an "inner club") and harmonise their tax rates if they so chose, even if this went against the will of the remainder.

It is this aspect of the Nice Treaty that Mr Anthony Coughlan of prominent "No" group, The National Platform, finds so objectionable from the business perspective.

Writing in this newspaper in June, Mr Coughlan argued that this provision could lead to the creation of a "two-tier, two-speed Europe, divided into first-class and second-class members", with the Republic on the weaker end. His view has been repeated on many occasions since, most recently in last week's edition of the Irish Catholic.

Mr Paul McGowan, chairman of KPMG's Irish practice, and leading light in the "IFSC for Yes" campaign is on the opposing side of the fight, a noteworthy stance given that he, his firm and his clients, are among those who have most to lose from tax harmonisation. Mr McGowan dismisses arguments such as that of Mr Coughlan as efforts to "muddy the waters" of the Nice debate. He believes that if the electorate rejects the Treaty for a second time, tax harmonisation will become a bigger, rather than less significant, issue, this time with "a lot less sympathy" for the Irish position.

Taking an average of the current corporation tax rates in application across the EU and the 10 accession countries (see table), harmonisation would see the Irish 12.5 per cent more than doubled to about 29 per cent, immediately eliminating the Republic's star competitive advantage. The Government is completely clear on its views on the matter: tax harmonisation will not be the way forward.

"Ireland is not for turning on this issue," said the Tánaiste, Ms Harney in February, addressing the Institute of Taxation. As recently as last Friday, the Minister for Finance Mr McCreevy told the IFSC audience he shared with Mr Sutherland that a move to take away national tax-raising powers would amount to an attack on democracy.

The fighting talk is not sufficiently scary to dismiss the question, however, with German Chancellor, Mr Gerhard Schröder saying a few months ago that the EU needed to "Europeanise everything to do with economic and financial policy". No longer ago than May, the European Commission was calling for extensive new powers over EU economic policy, even going as far as to suggest the abolition of national vetoes on tax. Even after Nice, taxation policy is likely to remain in the limelight.

Mr McGowan acknowledges that "the war is not over" on tax, but he and his colleagues, who have much to lose through harmonisation, believe that this Nice Treaty is the best way out, for now.

"There is no question that we will continue to fight battles," he says.