Germany ups pressure over corporate tax

GERMANY increased the pressure on Ireland to increase its corporation tax rate yesterday, signalling a hardening of positions ahead of next week’s summit when the Taoiseach Enda Kenny hoped to seal a deal on cutting the bailout interest rate.

The European Commission raised €4.6 billion of bonds, €3.4bn for Ireland, and €1.2bn for Romania, on the markets yesterday at a lower interest rate than for the previous €5bn bond sale in January.

Wolfgang Schaeuble, the German finance minister, speaking in Berlin, said Ireland had to move on the corporate tax issue because the difference to corporate tax elsewhere in the euro region was “unsustainable.

Linking the tax to reducing the 5.8% interest rate, Mr Schaeuble said Greece had taken additional measures in return for the rate cut. “It is not only a task for other member states of the eurozone to move, but it’s also a matter of Ireland itself.”

Mr Kenny rejected a proposal to agree to “engage constructively on the question of tax coordination” at last week’s summit in Brussels. Government sources said he was unsure what it would commit the country to. Some member states believed this was a mistake and diplomats are now exploring how other countries would interpret the phrase.

The Government would prefer not to make any commitment on tax matters in return for the interest rate cut and will hope to offer to put fiscal rules — such as banning budget deficits over a certain percentage of GDP — into legislation.

The attack on the country’s 12.5% corporation tax rate was led by France’s President Nicolas Sarkozy at the summit just a week ago with German Chancellor Angela Merkel chiming in.

But since then, the pressure has increased with finance ministers making further demands of Finance Minister Michael Noonan at Monday’s meeting.

Some support for Ireland came from the commission during the week when president Jose Manuel Barroso said that the offer to cut the interest rate was still on the table for Ireland and Economics Commissioner Olli Rehn said the EU/IMF programme did not demand a change in tax rates.

The commission’s launch on Wednesday of proposals for a common consolidated corporate tax base further highlighted the issue.

The Government said it would engage constructively in discussions on the proposal but they remain vehemently opposed to adopting it as they believe it would lead to tax harmonisation.

However Ireland is willing to sign up to developing a common corporate tax base, which would see countries using the same rules to assess companies’ tax liability but member states would collect their tax as they do now.

Mr Schaeuble said that this common base would be very helpful. “It won’t solve all problems but it would create more transparency.”

Negotiations are continuing on the comprehensive package expected to be finalised at next Thursday and Friday’s summit. The Pact for the Euro is agreed and a number of non-eurozone countries are signing up to its voluntary targets that include wages and pensions.

Work is continuing on changes to the current European Financial Stability Fund, from which Ireland received its loan, and the establishment of the European Stability Mechanism due to replace it in 2013, and finance ministers are expected to put the final touches to it on Monday in Brussels.

But as far as Ireland is concerned, the summit will not be the final word as the issue of recapitalising the banks has yet to be finalised. The results of the stress tests will not be known until the end of the month and will tell whether the €10bn plus the €25bn in contingency funding will be sufficient and whether the Government believes it will be possible for the taxpayer to shoulder the whole burden.

Additional reporting by Bloomberg