Ireland faces EU clash over tax rates

IRELAND is on course for a clash with France and Germany after Europe's two largest nations proposed harmonising tax rates across the economic bloc.

Ireland has benefited from the lowest rate of corporation tax and has resisted harmonised rates from the fear that multinational investors will flee the country.

Germany and France yesterday called on the European Commission to harmonise the way firms calculate their corporate tax bills and "if possible" propose a minimum tax rate, according to a letter obtained by Reuters.

"The German and French governments believe it is urgent to strengthen at European level a fair framework for competition for our companies within the internal market. We are therefore proposing that the Commission make a concrete proposal as soon as possible for a single corporate tax base, that if possible also includes a minimum tax rate," it read.

The letter, dated May 26 and signed by German Finance Minister Hans Eichel and his French counterpart Nicolas Sarkozy, said a minimum tax rate would not "stand in the way of healthy competition between member states".

However, Irish EU commissioner David Byrne said the success of the Irish economic model of low taxation has been "inspirational" to the new member states and, as a result, a number of the new EU countries will oppose any harmonisation of direct taxes.

In a first reaction, the European Commission rejected the call for a minimum tax rate, although it added that it also favoured harmonising the ways companies calculate their tax bills.

"The European Commission is in favour of harmonisation of the corporate tax base to increase transparency and lighten the administrative burden on companies doing business in more than one country," Commission spokesman Jonathan Todd said.

He added: "However, the Commission is not in favour of harmonisation of tax rates."

The Franco-German letter is the first formal request for action at EU level since Germany first aired its concerns on corporate tax rates in an enlarged EU in March.

Corporate tax rates among the new EU members range from zero in Estonia to 15% in Lithuania and Cyprus. By comparison, rates are around 40% in Germany and 35% in France.

Agreement on harmonising corporate tax methodology or rates would require unanimous agreement among the 25 EU states.

But Germany has indicated it will seek allies to press ahead with corporate tax harmonisation, outside the framework of the EU if necessary. It is permissible for states to co-operate on their own in certain policy areas, but it remains unclear if it can muster the seven other countries it would need to use such a procedure.

Poland on Wednesday reiterated its opposition to the idea after talks with German Chancellor Gerhard Schroeder.

Mr Schroeder acknowledged it might take time before deeper tax harmonisation takes root and said Germany was prepared to be wait. "There is a proverb in Germany that a drop of water eventually cuts through the rock," he said.

Additional reporting by Reuters.