Legal boost for low corporation tax

LOW corporation tax rates should not be challenged on the grounds that they are illegal state aid, according to a legal opinion from the European Court of Justice.

One region of a country can in certain circumstances also have a different rate to the rest of that member state, the opinion also said, in a change to what has been enforced by the European Commission up to now.

This advice, if followed by the court in its full ruling expected later this year, could have implications both for Ireland’s corporation tax rates and a new revised rate for the North.

Gibraltar, following a previous court case, was given fiscal autonomy by Britain and the territory’s government revised the tax rate to 10% for both onshore and offshore companies with a 20% tax rate on utility companies.

In 2004 the European Commission, supported by Spain, warned that Gibraltar’s new low tax rate amounted to regional aid by Britain since the same rate did not apply to the rest of Britain and as such was unlawful state aid.

However, the opinion of the advocate general — whose advice is accepted by the court in 80% of cases — said Gibraltar should be regarded as a territory in its own right for the purposes of its tax regime and as a result its tax rate could not be seen as state aid.

The advocate general, Niilo Jaaskinen, said that the rules on state aid cannot be used to combat the phenomenon of harmful tax competition between member states. The measures to deal with harmful tax competition fall within the field of direct tax policy, he said.

EU laws that relate to state aid seek only to remedy distortions of competition when a member state moves away from its general policy to give a particular advantage to certain undertakings of goods.

On the other hand, where a tax measure is of a general character, it constitutes an adjustment to general fiscal policy and not state aid, Mr Jaaskinen said. The same principle applies to harmful tax competition between EU member states and does not automatically fall within the state aid rules.

He rejected the Commission’s approach that says any inherently discriminatory tax system must be classified as state aid. Since Gibraltar had its own tax system, it could not be seen as discriminatory.

Fine Gael MEP Gay Mitchell, welcoming the opinion, described it as timely. It strengthens Ireland’s case against those who criticise our 12.5% corporation tax rate.

“These are matters for member states, even though the Gibraltar case is a regional matter it underlines the rights of member states in this area. It also indicates special treatment of Northern Ireland for corporation tax purposes probably could be introduced.”