EU to seek bank levy instead of rise in corporation tax

 

NEGOTIATIONS:IRELAND’S EU PARTNERS plan to end the stand-off with Dublin on corporate tax by ensuring that any IMF-backed rescue plan imposes a levy on all banks operating out of the country.

Diplomatic and EU sources in Brussels said they expect the Government to expand its yield from business taxes generally, even if it did not increase the 12.5 per cent corporation tax rate.

With acute pressure on Ireland’s public finances and political pressure from Europe, a source said it would be logical for Dublin to follow the example of special bank levies on banks in other member states.

The Irish bank levy proposal would offer the Government a chance to save face by leaving corporate tax untouched, while still meeting the demand of EU partners that the overall rescue package sees Ireland increase its corporate tax take.

Officials in Paris confirmed that several countries had been considering such a measure. French finance minister Christine Lagarde said yesterday that it was “quite desirable that Ireland use the taxation lever to reduce its budget deficit”.

Austria’s finance minister Josef Pröll said he saw “room to manoeuvre” on the tax rate. The levy idea is gaining traction in Berlin, too. “It’s of no use to try and humiliate a partner: we need an Irish government that’s able to act or the whole thing is worthless,” said a senior German government source yesterday. “But we are negotiating and it’s all about the mix because [Ireland’s] income side is simply too weak.”

Chancellor Angela Merkel described Ireland’s finances as “worrying” and defended Germany’s tough negotiating stance on aid. “It remains of elementary importance for us to stand up for hard measures and tough demands,” she said, “but on the other hand, we have to speak out clearly in support of the euro”.

Ireland’s 12.5 per cent tax has been a thorn in the side of EU partners for years, though there is understanding that Ireland views it as a pillar of its economic model.

In ongoing talks, EU partners are impressing on Government officials that the corporate tax rate makes it difficult to justify the rescue plan to European voters. EU leaders hope a bank levy would have two positive effects: raise Ireland’s below-average per-head tax take, helping to pay off deficits, and encourage bank shrinkage to prevent another existential crisis.

“This isn’t about the victor and the vanquished, this is about returning the Irish financial sector to a functioning state, which is in all our interests,” said Dr Michael Meister, finance spokesman of Dr Merkel’s Christian Democratic Union (CDU).

Dr Merkel’s Free Democrats coalition partners said yesterday they were likely to back calls for an Irish bank levy.

In spite of pressure on Ireland to increase its corporate tax rate, sources who listened to an EU finance ministers’ conference call last Sunday night said no country pressed to include an increase in the rate as a condition for European rescue aid.

But in Berlin, yesterday’s Bundestag debate on the federal budget was overshadowed by anxiety over the second EU bailout in six months. Ireland’s fear that raising the corporate tax rate will shatter the keystone of its economic model has come face-to-face with palpable German fears of being hooked up to a permanent bailout drip.

German politicians are concerned time is running out for them to put right as much as possible of what is wrong with the euro before voters – or the powerful Bild tabloid – turn on them.

“We have to get a deal through before the readiness among German voters for this evaporates entirely, and that is going fast,” said Dr Michael Fuchs, CDU deputy parliamentary leader.