Europe Editor Tony Connelly reflects on Friday's EU summit and the major talking point - Ireland's corporate tax system.
The EU summit on Friday, which continued into the early hours of Saturday morning, appears to have been a bruising affair.
The major talking point was a clash between French President Nicolas Sarkozy of France and Taoiseach Enda Kenny over Ireland's corporate tax system.
According to diplomats familiar with the meeting, President Sarkozy made a head-on demand that Ireland raise its corporate tax rate in return for concessions on the bail out.
This was flatly rejected by Mr Kenny.
But two separate sources have told RTÉ News that other countries, apart from France and Germany, expressed reluctance about lowering the interest rate for Ireland, or at least demanded something in return.
Other countries raised doubts over claims made by the Taoiseach that the EU-IMF programme 'wasn't working', suggesting that it was too early into the programme to arrive at such a conclusion.
As for Germany, well-placed sources have said that Chancellor Angela Merkel isn't 'quite so hung up' on the corporate tax rate.
'The Germans want something more political, in other words, Ireland has to be seen to be giving something in return for an interest rate cut,' said one senior diplomat. 'She's not as personally wedded to the idea of corporate tax rates as Sarkozy.'
It's understood no other member state sought a concession from Ireland on raising the corporate tax rate. In fact, despite the widespread comment in Ireland about the Government holding firm against a harmonised corporate tax rate, there are very few people in Brussels who feel it's a runner. It's simply too sensitive politically.
RTÉ News understands, meanwhile, that Mr Kenny sought at the outset a much higher interest rate cut than that later accepted by Greece, i.e. 100 basis points (1%).
Mr Kenny is also thought to have pushed for a 'rebate' on the margins Ireland pays, if we pay the loan back according to the repayment schedule. But that idea appears to have been dismissed.
As things stand Greece was granted – and accepted – a 100 basis points' cut in the interest rate and an extension of its loan maturity from four years to seven and a half. In return Greece has agreed to pursue a multi-billion Euro sale of state assets.
At their post-summit news conferences both Chancellor Merkel and President Sarkozy suggested that Ireland will have to offer something, by the time leaders reconvene for a crucial two-day summit on 24 March, in order to qualify for some easing of the terms of the bail-out, most likely an interest rate cut of 1%.
That suggests some intense thinking is required of the Government – with the distinct possibility that a concession may not be possible when push comes to shove. Between now and the summit Mr Kenny will be in Washington for the St Patrick's Day celebrations, so that doesn't leave a lot of time.
On Monday, Minister for Finance Michael Noonan will meet the European Central Bank President Jean-Claude Trichet on the margins of the Euro group meeting (the monthly gathering of eurozone finance meetings). He will also meet the EU Commissioner for Economic and Monetary Affairs Olli Rehn.
The Noonan-Trichet meeting will touch on what is, to the new Gvernment, the real elephant in the room: the true scale of the problems facing the banking sector. The issue wasn't officially on the table at the summit, but it's understood Mr Kenny raised it directly with the ECB president.
In particular the Government is concerned at the pace with which the EU-IMF programme requires a sale of bank assets. A too hasty fire sale could trigger further losses and lead to the need for further recapitalisation.
In any event, there are suspicions that the €35bn set aside for bank recapitalisation in the EU-IMF programme won't be enough. If so, the new Government is likely to argue that it can no longer afford to transfer more burden on to the taxpayer.
The other issue that looms large is the Common Consolidated Corporate Tax Base (CCCTB). Its inclusion in the draft pact for the Euro was one of the red button issues for the Taoiseach at the summit.
But the issue has been around for at least ten years.
The European Commission presents its long-awaited proposals on the issue on Wednesday. At present any multinationals locating in Europe must make a tax return for each of the countries in which they have subsidiaries. Indeed, if a small or medium size company wants to locate offices cross-border they must make separate tax returns, something that many may find prohibitively expensive.
Also, if a company has subsidiaries in different EU member states they cannot offset their losses in one member state against profits in another, as they can do within a member state.
The European Commission has long argued that this stunts economic growth in the single market, and dissuades multinationals from outside the EU from locating there, because of the accountancy costs.
What the Commission will propose on Wednesday will be a formula that decides which company revenues should be allocated to which country for corporate tax purposes. The formula will be based on sales, staffing levels, and capital costs. Once a multinational's profits are shared out between the member states in which their subsidiaries are located – according to the formula – those profits are then taxed at the local corporate tax rate, i.e. 12.5% in Ireland's case.
The Commission argues that multinationals will only have to make one tax return a year. But inevitably, with a formula, which shares out revenues, there will be winners and losers.
A Government source said Dublin was 'very, very sceptical' about the very notion of a formula, and said other countries shared Ireland's concerns.
Ultimately Ireland is worried that after the apportioning is done, multinationals in Ireland may not be able to declare all their profits at the 12.5% rate, and that that could encourage them to up sticks.
The Commission argues that the formula will be worked out in as fair a way as possible, and that in any case the proposal will go to the member states and the European Parliament – as does every Commission proposal – for their views and input. 'The formula could look very different after that,' said a senior Commission source.
As with every proposal involving tax, each country has a veto. The CCCTB will not be agreed at the 24 March summit; rather it will go through the normal legislative cycle, which could take up to two years, if not more.
At the end of that period Ireland can simply veto the idea.
But if it were to agree at the March summit to accept the idea of a common tax base, then it appears possible if not likely that we would win a concession on the terms of the bail out. Mr Kenny, however, made it clear that he regarded CCCTB as the 'harmonisation of corporate tax rates through the back door.'
Ultimately, however, at the end of the process, the idea of a common, consolidated corporate tax base could go to what is called 'enhanced co-operation.' This is a mechanism, contained in the Nice Treaty, whereby a group of like-minded countries can forge ahead on a particular issue.
Indeed, at the summit on Friday, the original draft suggested that the CCCTB could eventually fall under enhanced co-operation, but that reference was removed. Several member states felt it was simply premature.
In any event, enhanced co-operation can happen if nine member states agree. For the CCCTB to be effective though, it requires as many states as possible.
The question remains, would it be detrimental for Ireland if we stayed out? The issue is so complex (as are most accountancy matters) that the question has barely been addressed.
Tony Connelly, Europe Editor
