THE QUESTION of the elimination of tax competition in Europe has been raised as EU leaders discuss an escalation of the battle against the sovereign debt crisis, a debate which has the potential to threaten Ireland’s closely guarded 12.5 per cent corporation tax.
Although Taoiseach Brian Cowen insists that the Irish regime is non-negotiable, French president Nicolas Sarkozy and Luxembourg prime minister Jean-Claude Juncker each raised the matter of deeper euro zone policy convergence as the EU summit reached its conclusion yesterday.
The leaders agreed to revise the Lisbon Treaty to create a permanent bailout scheme in 2013 but took no concrete steps to reinforce or enlarge the existing €750 billion rescue mechanism the EU shares with the IMF.
German chancellor Angela Merkel said the extent of the fund must be convincing. “What is true for all the other mechanisms is also true for the permanent mechanism. We will do everything to secure the financial stability of the euro as a whole,” she sad.
Mr Sarkozy, who has criticised French-based multinationals for paying tax elsewhere, said as he left Brussels that euro countries should follow Franco-German plans to align their tax systems.
Mr Juncker, chairman of the group of euro zone finance ministers, said it would be difficult to evade debate on tax systems, “which must be given more harmony so that there is no tax competition” between member states.
Such remarks are significant as Mr Juncker has been promoting the introduction of bonds with a common euro guarantee as an effective way to tackle the sovereign debt crisis.
European leaders are deeply divided over the “euro bonds” concept, with Dr Merkel prime among the opponents. The question surfaced early at the summit dinner after leaders agreed a narrow revision to the Lisbon Treaty.
Although Dr Merkel has said the concept is off the agenda, both she and Mr Sarkozy said a week ago that euro countries must achieve deeper economic and budgetary harmonisation before such bonds could be issued.
The French leader returned to the theme of convergence yesterday, saying single currency governments should adopt deeper economic governance measures. “I don’t think you can have the lowest corporate taxes in the euro zone and then transfer your debt,” he said. “You can’t say I’m sovereign on receipts but for debts I can transfer them to a higher level. It makes no sense.”
Asked about these remarks, the Taoiseach said Ireland’s corporate tax rate was not Europe’s lowest. Saying other countries deployed incentives which had the same net effect as the Irish regime, he said the Irish system was transparent.
With euro zone finance ministers set to develop in the coming proposals for a “comprehensive response” to any challenges, the “euro bond” concept is likely to receive further scrutiny in the weeks ahead.
British prime minister David Cameron used the platform of the summit to declare French and German support for his demand to freeze the EU budget.