Poland – cutting taxes to the top?

Date: 17/03/05

On 11 February the French company Michelin signed a contract with the mayor of Olsztyn, a provincial town in the north-eastern Poland, to lease land where it is to erect its largest European logistics and storing centre and expand an already existing factory.

The 83-hectare plot of communal land is initially rented on a 99-year lease but the company promised to buy the land within ten years. The tenancy rent was fixed at 100,000 zlotys (225,000) a month. The city council has agreed to exempt Michelin from property tax for ten years and to finance the construction of the road to the site.

The Polish government granted the company a generous tax relief worth 146 million zlotys (e36m) and promised to allocate 2m zlotys (e500,000) for training new employees. The total value of the investment is estimated at e250-500m. About 500 employees will find jobs in the new centre. Already Michelin has employed 3,000 people in the region. Its choice was between Poland and Hungary.

Precise data concerning the number of firms that have decided to transfer production from western Europe to Poland are hard to pin down. Statistics of this kind are not published in Poland and most of the western companies carefully hide these facts in an attempt to maintain their positive images in their countries of origin. But examples multiply.

The German manufacturer Draxelmaier has announced recently that it is planning to close its factory in Emden in Lower Saxony and move the production of electric and optical fibres to Poland. The lorry company Heil Trailer International wants to move a part of its production of cistern lorries from the UK to Poland. The food conglomerate Heinz made a similar declaration.

The 3M corporation has decided to move the manufacture of medical supplies from its factories in France. LG plans to leave Germany and start producing flat TV screens in Mlawa. Opel will start production of its Zafira model in the factories in Gliwice, Upper Silesia. Up to now, the only factory assembling this car was in Bochum, Germany, but a decision has been taken not to expand production there. Daewoo has closed its enterprises in France and moved to Pruszkow near Warsaw (incidentally, the seat of the Polish mafia). It produces household goods and TV sets there. Thomson has shifted its production of monitors from France to Zyrardow.

While productivity in Poland is half that in western Europe, the costs of hiring an employee are four to five times lower. Boston Consulting claims that nowadays the production in Poland is at least 30% cheaper than across the country's western border.

At the end of January 2005, the new Siemens board of directors announced plans to sack 1,350 employees from its telecommunications department in Germany and - at the same time - to increase significantly the volume of its workforce in Poland. Preparations for starting production of domestic appliances in the company's third factory located in the Lodz Special Economic Zone have just been completed. About 700 Poles will find jobs there. At the end of 2004, the Indesit Corporation said that it was transferring all its accounting operations to Poland. Philips has replaced some of its factories from the Netherlands to Pila.

Such decisions have provoked anxiety, particularly in France and Germany. Delocalisation, from the perspective of the economies of those countries, has not yet reached spectacular dimensions. But in some regions and in some sectors it has reverberated painfully. The vicinities of Lyon and Lille with their growing unemployment are good examples, as well as the textile or car sectors. In Germany, the international corporations alone have reduced employment by 400,000 because of delocalisation. The numbers for domestic companies are probably much higher.

Another significant factor helping to lure western companies to Poland and other countries of the region are low taxes. In 2004, the corporate income tax went down from 27% to 19% in Poland and from 25% to 15% in Slovakia, Lithuania and Latvia. These countries also grant long-term tax exemptions for foreign companies that open up businesses on their territories. Their governments justify such policies as protective measures against the potential outflow of capital to the more stable economies of western Europe. Others in the EU perceive this as tax dumping, which is, according to such critics as German Chancellor Gerhard Schröder and French President Jacques Chirac, a form of unfair competition.

Hence, the call of the countries from 'old' Europe, particularly France and Germany, which suffer the most from the transfers to 'new' Europe, for harmonisation of taxes. The French and the Germans suggest levelling income tax rates within the borders of the whole Union. Many observers, however, doubt whether it is possible to stop delocalisation by such administrative measures.

According to some experts from the Organisation for Econmic Co-operation and Development (OECD) the companies from the West have no choice but to move to the East if they wish to survive on the market. They have to cut costs and they will move to where the production costs are cheaper. "The declarations of the politicians are meaningless in

these circumstances," says Thomas Hatzichronoglou from the OECD. "The administrative means can work only in the short term," he adds.

"Delocalisation can only be stopped by the French and the Germans themselves. Instead of dictating conditions to others, they have to create a friendly atmosphere for the entrepreneurial environment in their own countries, promote new technologies and improve the production quality. If they followed the American patterns, they would create about two million additional jobs in hotels, restaurants and trade alone."

Many Polish economists take the same line. They warn that if the attractiveness of central Europe for investors decreased, the alternatives would be China and south-eastern Asia, where costs are even lower, the access to new technologies broader and the ability to quickly increase in sales on the dynamic local market even greater.

But there is a soothing message coming from Poland about tax rates. "If new members of the EU are to achieve the same level of public services as the 'old' 15, the decreasing transfers accompanying the growing stability of the economies in new EU member states will inevitably necessitate a gradual increase in taxes in these countries," says professor Janusz Kudla from Warsaw University. "Therefore, we can assume that low tax rates are only a temporary phenomenon, which does not require political pressures on harmonising income taxes within the Union right now."

• Wieslaw Horabik is a freelance journalist based in Poland.

Article reports on recent increases in relocation of industry and jobs from Western Europe into Poland, attracted by low wages and low corporate taxes.