Van Miert targets Ireland's 10% corporation tax

With customary zeal, the EU's Competition Commissioner is seeking reforms in Europe's state aids regimes. Mr Karel van Miert views the £75 billion spent in direct national state aids to industry every year and implicit subsidies through special tax regimes as a colossal distortion of the market and a waste of funds in needless competition between memberstates.

That perception has been reinforced by the controversies over the relocation of Renault from Vilvoorde in Belgium to Spain and that of Boston Scientific from Belgium and Denmark to Ireland.

When the Tanaiste, Ms Harney, and the Minister for Finance, Mr McCreevy, came out of a meeting with Mr van Miert two weeks ago they had the shell-shocked look of people who had seen the steel in the Belgian's character. Since then a difficult meeting at officials level has confirmed that the Government faces a major challenge.

The defence of Ireland's corporate tax regime and job subsidies was never going to be a pushover.

The Government is fighting a rearguard action on several related fronts. A combination of the Commission's war on tax competition and the reality that Ireland's economic success is about to deprive it of "less-favoured region" status, is squeezing simultaneously both the corporation tax regimes and our generous job subsidies.

In theory, general taxation levels are not a matter for the Commission. But complaints from member-states about job-poaching by countries with low company tax regimes led to the establishment of a working group under the Internal Market Commissioner, Mr Mario Monti.

Mr Monti has produced a voluntary code of conduct for member-states which will urge harmonisation of company tax regimes within countries. He has failed, however, to get agreement on the bigger prize of harmonisation between member-states. But the voluntary code will impose a responsibility on Ireland to live up to the promise made by both the last government and this coalition to bring about gradually a standard rate of company taxation. At issue between the Government and the Commission is the length of time it will take to bring the 36 per cent tax on services and other more heavily-taxed sectors to the level of tax on manufacturing exporters and on IFSC or Shannon-based companies.

Currently, IFSC and Shannon-based businesses are offered a tax ceiling of 10 per cent until 2005 for businesses established there before the year 2000. Manufacturing exporters enjoy similar benefits until 2010.

The last government announced its intention to extend such rights beyond those dates to at least 2025 at a rate of 12.5 per cent and to progressively cut other corporation taxes to that level. Fianna Fail and the PDs remain committed to a figure of 10 per cent although there have been hints that Mr McCreevy would be happy to settle for 12.5 per cent. Such a rate is believed by the Department of Finance to be largely self-financing through the stimulus it would provide to investment and job creation.

Tax regimes which discriminate on a geographical or sectorial basis are regarded by the Commission, backed up increasingly by a body of European Court of Justice case law, as a form of state aid and therefore subject to notification to and approval from the Commission. Hence Mr van Miert's interest.

Clearly the special provisions for the IFSC and Shannon, and the proposals to create enterprise zones around regional airports, fall under these notification requirements. Whether the manufacturing exports regime does may end up having to be decided by the European Court of Justice.

One way or other, however, the Commission is insisting on its right to review its authorisation of the IFSC and Shannon regimes.

The Government appears to have decided that it is better to seek a compromise package on all the related issues rather than a legal battle with all the uncertainty that would bring to business.

Both sides are being coy about how they see the issue being resolved, but Commission sources say they accept that the principle of "legitimate expectations" means businesses already in place before 2000 in the expectation of particular tax rates cannot be disturbed.

The issue then is how to treat newcomers in the post-2000 period, with the Commission's opening negotiating position likely to be that, in theory, they should pay tax at the prevailing general rate.

Such an approach would be utterly unthinkable to Dublin, cutting the ground completely from the central plank of its international campaign to attract investment. An acceptable compromise may be found, however, in Dublin agreeing to speed up considerably the promised reduction in the 36 per cent rate to a new common level, a move with significant budget implications.

But as IBEC's European Director Peter Brennan, argues "the 10 per cent tax regime is the biggest and most important thing we must preserve".

He is also urging the Government to make clear as soon as possible what the final common rate of tax will actually be in the post2010 period as some companies are preparing investment plans now.

Regional aids are another matter, but linked in current negotiations with Mr van Miert. They are the EU's name for member-states' own geographically-based cash subsidies to businesses and are a particularly important part of Irish state aids - some 75 per cent of the total. Limits on them are linked to the economic strength of the region concerned.

Ireland has been classified as a less-favoured region because its GDP has been less than 75 per cent of the EU average, but in the post2000 period, a victim of its success, will be reclassified.

Currently the Irish State can fund up to 55 per cent in "net grant equivalent" of an investment but this could be reduced to 25 per cent - or even lower. At issue is how fast Ireland will be expected to fall into line from the year 2000.

Mr van Miert is proposing two years to reduce subsidies on operating costs and four years on investment aid. The Government is believed to be pressing for a phasing more in line with that for the structural fund "soft landing" - as close to six years as can be negotiated.

Commission sources say the Government will also have to take a strategic decision at some point whether to split the country up into several regions so that poorer rural areas can still benefit from the larger subsidies. But they too are facing the prospect of becoming too prosperous. Such are the problems of success.