Common EU corporate tax rate back to haunt Kenny

FRANCE AND Germany are reviving their push for the harmonisation of business taxes in the EU, saying in a joint paper to European…

FRANCE AND Germany are reviving their push for the harmonisation of business taxes in the EU, saying in a joint paper to European leaders that this is essential to promote economic growth in the union.

The joint initiative could spell fresh trouble for Taoiseach Enda Kenny in the year after he faced down sustained pressure from Paris and Berlin to dilute the Irish corporate tax regime in return for an interest rate cut on Ireland’s EU-IMF bailout.

Furthermore, it comes as Germany pushes back against moves to water down any requirement for constitutional limits on debt and deficits in Europe’s new fiscal treaty.

The tax and treaty questions are part of separate portfolios in a wider package of measures to overcome Europe’s financial crisis.

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In each case, however, Kenny finds himself on the opposite side of the argument from German chancellor Angela Merkel.

He would prefer if it were otherwise, not least because the chancellor’s support will be required if Europe is to take measures to reduce the cost of Ireland’s bank rescue.

The Franco-German paper, submitted in advance of two EU summits in the next six weeks, presents a series of proposals to stimulate Europe’s moribund economy.

These include measures to combat youth employment, boost the financing of companies, make better use of European funds, modernise public administrations and improve access to markets outside the EU.

The reference to tax is made in a section on the reinforcement of financial market regulation, a hot topic in Europe as it grapples with the still-unresolved emergency in the euro zone.

There is no explicit demand for a common corporate tax rate in Europe, even though Merkel and French president Nicolas Sarkozy are moving to develop a common rate in Germany and France.

In their joint paper, however, they make a point of promoting the creation of common consolidated corporate tax base (CCCTB) in Europe.

Such a plan would introduce a common European formula for the calculation of tax on the profits of firms operating in more than one member state.

Dublin sees much to fear in a system like that as it would reduce scope for companies seeking to maximise the profit they book in Ireland, thereby dimming the lustre of Ireland’s 12.5 per cent tax rate.

“European institutions and member states should accelerate the process of tax co-ordination in order to foster growth, removing obstacles to the functioning of the single market and preventing tax abuse and harmful tax practices,” the Franco-German document says.

“In particular, the negotiation of the European Commission proposals on [the] energy tax directive, common consolidated corporate tax base and common system of financial transaction tax should be accelerated.”

Kenny is on record as saying he views the creation of a CCCTB as a “back door” route to tax harmonisation.

Last year, however, he pledged his Government would engage constructively in talks on this very initiative when Ireland joined the EuroPlus competitiveness pact, and did so again when the interest rate on the bailout was cut.

While the commission’s CCCTB plan is a slow-moving project, the Franco-German paper makes clear that they would like to see swifter progress.

They see this as part of a wider project. “In order to set the stage for enhanced tax co-ordination, France and Germany express their support for the European Commission’s proposal on a common system of financial transaction tax and will by the end of February present proposals on the convergence of their corporate tax.”

In addition to all that, the document calls on EU leaders to speed up implementation of the EuroPlus pact.

It also says the commission should prepare a detailed analysis based on objective indicators on “how competitiveness has developed in member states and the extent to which the EuroPlus pact participants have fulfilled their 2011 commitments.”

The clear implication there is that any half-hearted “constructive engagement” with key initiatives should be exposed.

While it is as well to point out that this is a discussion document for all member states and not targeted at any one of them in particular, the implications for the Government are clear enough. None of this would augur well if there was to be a referendum on the fiscal treaty.