EU threatens to target our key tax break for foreign firms
Multinationals could leave if rate rises
A FRESH threat to Ireland's crucial 12.5pc corporation tax rate has emerged in new proposals from the EU Commission, the Irish Independent has learnt.
Scores of multinationals, employing thousands, would be likely to leave Ireland if there were changes to the rate, which is less than half that operating in many rival locations.
A draft working paper from the commission claims different rates of corporation tax distort the single market and discriminate against small firms who cannot easily move to lower-cost locations. The costs of having 27 different tax systems are also very high, the document claims.
Ireland is likely to oppose any moves towards what is known as tax harmonisation, but the EU Commission wants to make the region more competitive -- and having different rates in different locations is viewed negatively.
The different rates are causing "bottlenecks" and higher costs to business, the document circulated in Brussels -- and seen by the Irish Independent -- states.
The document claims there is "particularly intense tax competition'' between countries, but the different systems "make it difficult for companies to operate efficiently in the single market''.
The EU Commission has floated proposals to harmonise corporation tax before, but these have run into fierce opposition.
During the debate on the Lisbon Treaty senior European politicians claimed there was no imminent threat to Ireland's 12.5pc rate.
But the latest discussion document says the current system, where tax policy is set only by national governments, disadvantages smaller firms in particular.
"It should also be pointed out that the current fragmentation of the single market can be detrimental, especially to SMEs," it states.
The document said large multinationals have the resources to locate elsewhere or put money through different subsidiaries, but this cannot be done by small, locally-based companies.
"It is noteworthy that, currently, only 8pc of SMEs engage in cross-border trade and even less have set up subsidiaries or joint ventures abroad,'' the document adds.
The proposals -- which are purely for discussion among commission members at this stage -- are designed to help the EU compete with other major economic powers such as the US, China and India. If there was any move towards tax harmonisation, support from Germany and France would be crucial.
However, the latest proposals are even more radical than previous discussions of the area.
For example, this time VAT is also mentioned as an area to be studied. At present countries operate with different VAT rates. Again the EU Commission is worried about the cost for firms.
"The VAT system as currently designed has limitations in a number of areas, leading in particular to a disproportionate administrative burden for companies," it states.
"The complex system of rates and exemptions, the derogations and options offered to member states and the special rules for cross-border transactions are harmful to the smooth functioning of the internal market."
Ireland will oppose any attempt to harmonise corporation or VAT rates.
But the country is already facing growing competition in the corporation tax area, particularly from countries which have joined the EU in 2004.
While Ireland's rate is 12.5pc, these so-called accession countries have an average rate of about 20pc.