Tony Connelly looks at where Ireland stands in Europe on the Corporate tax issue
The future shape of eurozone economies is destined to be forged over a seven week period culminating in a crunch summit of EU leaders on March 24-25.
At last week’s summit in Brussels all talk was of the Franco-German plan which would drive the kind of fundamental change to the eurozone in a way that would provide both German voters – and the international markets – with the reassurance they need.
But the question now is: was the drive really a steamroll, and has it damaged chances of success?
At present it looks like Angela Merkel and Nicholas Sarkozy misjudged the mood of the other member states with their so-called Convergence and Competitiveness Pact.
'They seem to have underestimated the reaction on the process and the content,' said one official.
The thematic outline was no surprise. Paris and Berlin want eurozone economies to converge so that a monetary union is more like a fiscal union, in other words, budgetary policies are converged in such a way as to make the Greek debt crisis and the Irish property bubble / banking crisis an impossibility, and to make the competitiveness that has rendered Germany a world-beating exporter more of the norm across the eurozone.
But the kind of things they were looking for strayed too far into national sovereignty for the liking of other EU leaders, even countries which are normally fiscally prudent.
'The Franco-German plan has hit a brick wall,' said another EU source.
The idea of abolishing the index-linking of salaries immediately drew fire from Belgium and Luxembourg. In Belgium private and public sector salaries are automatically linked to inflation.
The idea of setting of an EU retirement age – albeit a floating age based on national demographics – drew opposition from the Netherlands, which normally lines up alongside Germany on fiscal discipline.
And on a subject close to Irish hearts, the suggestion of a minimum corporate tax rate drew opposition not just from the Taoiseach Brian Cowen – in Brussels for his last summit – but from countries like Estonia and Cyprus.
According to sources with a knowledge of the exhanges between the leaders, Mr Cowen stuck to his guns - in response to President Nicholas Sarkozy’s position on corporation tax and, indeed, to his dubious affections - despite the Taoiseach’s authority having been bruised by domestic events.
The French president is understood to have used the ultimate in Gallic cosying-up, saying: 'Je t’aime…', before qualifying that 'love' with the wounded tale of how he had been forced to go to the French parliament to win approval for the Irish bail out.
Mr Cowen is understood to have reminded his counterpart that he needed to appreciate his assessment, even if it was his last summit, that there was no evidence that introducing a minimum corporate tax rate across the EU would enhance the competitiveness of the bloc as a whole.
In any event, the feeling in Brussels is that the French may have blinked on corporation tax. At his news conference at the end of the summit President Sarkozy spoke of having a comparable 'basis' upon which company profits were taxed across the EU.
This is now taken to mean a harmonised, or converging, corporate tax base, not corporate tax rates.
That issue has been around for some time, and the European Commission was anyway expected to issue proposals on a Common Consolidated Corporate Tax Base (CCCTB) next month as part of a wide-ranging plan to improve the workings of the European Single Market.
At present businesses which operate cross-border have 27 different rule books on how to calculate their tax base.
The European Commission believes a single set of rules would make it cheaper for businesses and make the EU more attractive to foreign investment.
Although the proposals have yet to be published, it’s understood that under the CCCTB plan, companies could file a consolidated tax return with the authorities in the principal Member State, incorporating their profits and losses for the whole of their activity in the EU.
This consolidated tax return would establish the tax base, which would then be allocated to all the Member States concerned according to a harmonised formula.
The formula would take into account Labour, Capital and Sales, and after the tax base of the company was divided using the formula, Member States would then be able to tax their portion at their own rates.
The government, however, has always been sceptical (Mr Cowen used that word in his post-summit news conference), although officially it is still waiting to see the detail.
A study by chartered accountants Ernst & Young, commissioned by the Department of Finance in 2008, argues that the division and portioning off of cross-border profits would blunt or prevent multinationals in Ireland from maximising their profit, ie at Ireland’s 12.5% corporate tax rate.
The paper, which was presented to the EU’s tax commissioner Algirdas Semeta in January, went further, saying that 200,000 jobs could be lost in Europe since only three countries – Spain, France and Belgium – would benefit from a harmonised CCCTB system.
However, the government will engage on the issue. There is a feeling that some kind of consolidated tax base would be a less bitter pill to swallow than a minimum corporate tax rate. In return, of course, Ireland may win a concession on the interest rate that is applied for our bailout (and indeed for all other bailouts in the future).
Over the next seven weeks the CCCTB idea will go into the mix along with all the other ideas which are designed to finally draw a line under the crisis bedevilling the single currency.
There is acknowledgement that Angela Merkel needs concrete solutions if she is to convince German voters, and the Reichstag, that the eurozone’s main rescue fund, the EFSF, should be made bigger and more flexible. Germans are, after all, the ones who will foot most of the bill.
But as the president of the European Council Herman Van Rompuy prepares to consult with national capitals and to work alongside the European Commission in preparing a compromise paper in time for the March 24-25 summit, the new resentments which have re-emerged may mean that agreement will be harder reach than ever.
Tony Connelly
