New member states battle French attack on low corporate tax rates

By Anna McLauchlin

Date: 16/09/04

FINANCE ministers from the new EU member states have launched a detailed rebuttal of accusations that their low corporate taxes are damaging their neighbours' economies.

Speaking on the fringes of the Scheveningen informal ministers' meeting on 11 September, Estonia's Taavi Veskimägi and Slovakia's Ivan Miklos said the corporate tax issue had been oversimplified.

"Taxation levels are impossible to measure just by rates," Miklos told European Voice.

"The level of taxation is the tax burden and sometimes Slovakia has a lower tax rate but a broader tax base, so we have as high an effective tax burden as those countries with 25% or 30% corporate tax rates."

Both Miklos and Poland's Finance Minister Miroslaw Gronicki said they had raised the tax burden issue with the European Commission at the meeting.

"The most effective way of measuring the corporate tax burden is to measure the share of corporate tax earnings to gross domestic product [GDP]," said Miklos.

"On this, Slovakia has a bigger tax burden than Germany; our corporate tax revenue is currently 2.2% of GDP. By IMF figures in 2002, Germany's was 0.7% of GDP."

Gronicki said that Poland's corporate tax revenue was 2% of GDP.

French Finance Minister Nicolas Sarkozy reiterated in Scheveningen his criticism of low corporate taxes in new states, which he said were damaging the French economy. Germany supports Sarkozy's position.

France and Germany's rates range from 35-40% compared with Poland and Slovakia's 19%.

Latvia, Lithuania and Cyprus charge 15%, while Estonia has a 0% rate on companies which reinvest their earnings in the country.

But Estonia's Veskimägi said those member states which have criticized new EU members' corporate rates should look closer to home for the solution to their sluggish economies.

"One point we should put on the table is what the real obstacles are to the internal market and we should look at the bigger picture than just corporate tax. We should consider high labour prices and over-regulation. Maybe we should explain the difference between nominal and effective rates," he went on.

"Estonia has a low nominal rate but the effective rate is higher because we only have a few tax exemptions compared to Germany.

"It's a very complicated issue and has been oversimplified."

Miklos was even more categorical. "Behind all of this are domestic problems and increasing pressure from the markets, from competition and from companies which are trying to find better situations abroad.

"The common problem is the lack of structural reforms and the lack of market flexibility in some countries," he said.

Miklos also rejected Sarkozy's accusations that the new member states want to use EU funds to make up tax losses. "Politicians say we have less money because we have less taxes, but this is not true," he insisted.

"We have reduced direct taxation and cancelled some taxes, but we have increased VAT to 19% from 14% and we have also increased excise duties to EU levels. So our taxes overall are not lower than last year."

Both Miklos and Veskimägi criticized Sarkozy for calling on member states to refuse aid to new members whose corporate tax is below the EU average.

"Tax reforms are ways of achieving higher sustainable economic growth," Miklos argued.

"Once we have that, we will take less money [from the EU] because we will catch up sooner with developed countries."

"My choice is clear," Veskimägi said. "I want to keep very business-friendly and help my country in my own way, not to look to structural funds."

The Commission told ministers in Scheveningen it would step up work on creating a common EU tax base for those member states that wish to participate.

The Commission said five states opposed the plans: the UK, Ireland, Slovenia, Malta and Estonia. But Miklos said Slovakia would not back the proposal either.

Finance ministers from the new EU Member States have launched a detailed rebuttal of accusations that their low corporate taxes are damaging their neighbours' economies. Speaking on the fringes of the Scheveningen informal ministers' meeting on 11 September 2004, Estonia's Taavi Veskimägi and Slovakia's Ivan Miklos said the corporate tax issue had been oversimplified.