'Tax competition in the best interest of EU'

The news that France and Germany are to press for the abolition of national vetoes on some tax issues has revived one of the most sensitive issues in EU policy - tax harmonisation. The Minister for Justice, Mr McDowell, this week restated the Government's opposition to any such move, adding that he believed that tax competition is in the best interest of the EU as a whole.

"For my part, I believe passionately that tax harmonisation would be more damaging than helpful in the process of economic development of the EU," he said.

Advocates of the extension of qualified majority voting to some tax issues stress that they are not calling for any harmonisation of income tax rates. Most are concerned solely with corporate tax, arguing that very low rates such as Ireland's are distorting the single market.

In a debate on the issue at the Convention on the Future of Europe, only two speakers suggested that the national veto should be abolished for all tax issues. Many made a distinction between fair and unfair tax competition but a great majority wanted some extension of qualified majority voting.

The Convention's working group on Economic Governance failed to agree on a common position but most members wanted to make some changes to the way the EU makes decisions about tax.

"The objective of these changes should not be the establishment of unified taxes, nor should it concern the areas of personal and property taxation. The objective should rather be to provide for sufficient approximation of rates, minimum standards and tax bases in the areas of indirect and company taxation to ensure that the proper functioning of the single market is not affected by harmful tax competition or serious internal trade distortion," the group said in its final report.

France and Germany have long complained that businesses are being lured away to states such as Ireland by low corporate tax rates. They fear that the problem will get worse when 10 member-states join the EU in 2004, among them countries that already use low corporate tax to attract investors.

France has been especially vociferous in its argument that "unfair tax competition" not only distorts the EU's single market but threatens minimum social standards by starving the state of resources.

Germany is struggling with the consequences of a disastrous tax reform that cut corporate tax rates during Mr Gerhard Schröder's first term in office. Local communities, which depend on tax revenues from businesses, have been especially badly hit by a sharp drop in income.

Implacable opposition from Ireland, Britain and Sweden will almost certainly ensure that the Convention will not propose any change that could lead to tax harmonisation. But there are strong arguments for agreeing common rules on tax bases that would lead to greater transparency in taxation throughout the EU.

Ireland's economic argument in favour of retaining national control on all tax issues could weaken after the accession of the candidate countries, some of which are likely to have lower corporate tax rates than Ireland's. But the Government's opposition to tax harmonisation is as much ideological as economic.

Ministers argue that taxation goes to the heart of national sovereignty and that politicians who set tax rates must be directly accountable to the people on whom those taxes are levied. They believe that, even if a new treaty makes the EU more democratically accountable, the national sphere will remain the most important political arena.