Battle for tax rate harmony heats up

THE battle to harmonise tax rates across Europe is likely to hot up rather than disappear over the next few months, despite the elimination of potential loop-holes in the new Constitution.

At present Ireland has the lowest Corporation tax rate in the EU 25 at 12.5%, though its effective rate according to Deloitte Touche is just marginally more attractive to investors than those in many of the new EU member states.

France and Germany, with rates of 34% and 38% respectively, are increasing the pressure to harmonise corporation tax, and they would like to see everyone's rates increased to come closer to their own.

There are a number of reasons for their concerns. One is to do with the March decision of the European Court of Justice that allows companies to shop around Europe for lower tax rates. Up to now countries could discourage companies from moving by taxing them on disposed assets. Now, however, the Court has said this is contrary to the principle of freedom of establishment.

Another concern is as a result of the European Company that will come into being in October. It will mean a company can operate across borders by locating its factory in a low wage country and its headquarters in a low tax country where it will pay corporation tax.

While Ireland may feel it's sitting pretty with its 12.5% corporation tax rate, a survey by Deloitte and Touche that compares our effective tax rate to those of the 10 new member states found otherwise. Many intend reducing their rates further and with various allowances at least four countries Lithuania, Latvia, Hungary and Cyprus will end up with effective rates slightly lower or within 1% of the Irish rate.

The authors commented that while Ireland fared well in the comparisons, "We should be in no doubt that competition will become ever fiercer. Ten years ago we had both a comparatively low rate of tax and cost advantages. Now we merely have a tax rate that is marginally below average."

Faced with these developments, the German Chancellor Gerhard Schroeder and French President Jacques Chirac, following a meeting in Paris a few weeks ago, said they intend to push the European Commission to harmonise corporate taxes by setting minimum rates.

Ireland and Britain have been joined by the new members in their fight to prevent such harmonisation. "We simply dismiss any efforts leading to harmonisation in the area of taxes," the Slovak Finance Minister Ivan Miklos said recently.

Those arguing against harmonisation upwards argue that Europe is already losing out on investment to Asia and other parts of the world.