Taxing times for Irish business incentives

Date: 26/06/1997

By Chris Johnstone

EUROPEAN Commission competition officials are scrutinising Ireland's low-tax regime for business and financial services, one of the motors driving the country's buoyant economy.

The system has been criticised by envious outsiders who claim that it has helped the Irish to poach outside investment and jobs unfairly.

Attention is focused on the republic's corporation tax, for which a low 10&percent; rate currently applies to the profits of all manufacturers of goods and some specified services such as ship repair, certain shipping activities, data processing, software development, teleselling and film production.

The rate also applies to financial services which have set up in Dublin's sparkling new offices at the Customs House Docks, and airport repair and maintenance around Shannon airport.

In spite of loud protests from other EU countries about the low-tax facilities, they have until now gone unchallenged since their introduction more than 20 years ago, with the special regime for Dublin financial services cleared by the European Commission in 1987.

Now, however, the Irish government plans to change the system, with a single 12.5&percent; rate of corporation tax on trading activities for all manufacturing industries and financial services. Trading activities broadly comprise net profits from the sale of goods and services but exclude items such as interest income. Financial services firms will lead the change in 2005, with the manufacturing sector following in 2010.

The move would appear to be aimed at pre-empting any Commission attack on the current programme. The Irish authorities have notified the changes for clearance by the Commission, but are confident they have overcome any possible problems by introducing an across-the-board level of corporate tax for all manufacturers and services and, in particular, ending the special status of Dublin's dockland financial centre.

“On financial services, we had the choice of lowering domestic rates of tax to the level in the Dublin area or increasing rates in the Dublin area to those outside. We have gone for a compromise by slightly raising the overall rate,” said a finance ministry spokesman.

Competition Commissioner Karel van Miert recently appeared to agree when he told MEPs that the Irish incentives seemed to be “becoming more general measures”. But his officials say they still have questions about whether the regime is as general as it is made out to be or whether it could still be benefiting specific sectors.

The Commissioner is attempting to clamp down on special sectoral aid programmes in order to prevent an escalation of the subsidies and bidding war between governments wanting to attract new jobs and investment.

Recent successes for the Directorate-General for competition (DGIV) include alterations to Belgium's Maribel programme, which offered tax breaks to exporting companies, and an attack on French government attempts to give special advantages to some textile companies.

Officials this year deepened a probe into a complex Dutch case where electronics giant Philips and the now bankrupt aircraft manufacturer Fokker were able to sell their technology to a private bank and buy it back again under government tax rules. The Dutch government claimed that the so-called sale-and-lease-back operation was a general tax measure open to every firm and was not designed as a special aid to ailing companies.

The Commission is attempting to take action on tax competition even though governments say it is a matter for member states. Last week, Internal Market Commissioner Mario Monti invited Van Miert to speak to his high-level taxation group regarding the links between fiscal incentives and state aid policy.

Monti is trying to persuade member states, through the tax group, to agree to a 'standstill' in the introduction of any further corporate tax breaks which could be considered predatory and specifically designed to entice investment from another EU country.

A 'code of conduct' is under consideration to establish a system of 'peer review' by all member states and the Commission to determine, on the basis of a few guiding principles, whether or not a tax measure is predatory.