Irish get agreement on tax-cutting deal to maintain incentives for companies

Date: 21/05/1998

By Chris Johnstone

IRELAND has struck a deal with the European Commission which will allow it to safeguard generous tax incentives for foreign companies for a few more years.

Competition Commissioner Karel van Miert and Irish Minister for Enterprise, Trade and Employment Mary Harney have agreed a formula under which Dublin will cut its overall levels of company tax over time to bring them more into line with the special deals offered to foreign firms.

The convergence of the general and special tax regimes will make it difficult for other EU member states to continue accusing Ireland of unfairly poaching companies and jobs.

Belgium and Denmark have been particularly critical after US giant Boston Scientific closed down its operations in their countries and relocated to Ireland.

Denmark is now considering a cut in its business rates, fearing that a new fixed link with Sweden might encourage some of its companies to cross the Øresund to take advantage of the lower corporate rates there.

Attracting high-tech export firms has been the hallmark of Dublin's job-creation policy over the last decade. German airline Lufthansa this month testified to the continued success of this approach by opening an international call centre in Ireland.

Van Miert has made it a priority to clamp down on discriminatory tax regimes, where fiscal favours are offered selectively to companies or sectors, insisting they are just as damaging as unfair subsidies.

However, the Commissioner is powerless to act against tax regimes in which low rates are levied across the board, however much this might annoy neighbours.

The Irish solution exploits this fact by proposing to slash the general level of corporate tax from 32&percent; to 12.5&percent; as early as 2003, with cuts spread out evenly over the next five years. The lower rate will become the new common business rate.

This should allow exporting companies to safeguard their entitlement to the current preferential 10&percent; tax rate until 2010 and international financial sector firms to benefit from that rate until 2005.

In this way, Dublin will maintain its attractiveness at the cost of a sizeable cut in overall revenues from business.

However, Van Miert and the Irish government have yet to settle the issue of how to vet companies which are in the process of negotiating favourable tax status with Dublin, amid Commission fears of a flood of firms attempting to benefit from the 10&percent; rate. Ireland has offered the Commission a list of the companies with outstanding applications and information on the average number of requests each year for special tax treatment.

The Commission is likely to turn its attention to other tax regimes in the autumn, once it has established a general code outlining what is and is not acceptable with national governments.

Ironically, Van Miert has also said that tax measures in Belgium and the Netherlands should be investigated. The Belgian investigation will centre on favourable rates of tax for multinational companies.