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Tax battle -- are we losing to Germany?

IRELAND'S corporation tax rate is more at risk than ever this weekend as a behind-the-scenes diplomatic effort by the Government aimed at protecting it has not met with success in Europe.

If anything, the divergence between the stated position of Ireland and the demands of Germany and France, in particular, has widened in recent weeks. This has raised fears here for the first time that the Government may be forced to capitulate on the issue.

Minister for Finance Michael Noonan, who has declared himself to be "new around here", had a "good conversation" with the Germans and "nice discussions" with the French in Hungary on Friday.

Afterwards, he said "everybody is well aware" that the "Government is not for turning" on German and French demands for a dilution of the corporation tax regime here in return for a 1 per cent interest-rate cut on Ireland's bailout.

Mr Noonan, who has placed great store in "building up relationships" in Europe, added somewhat cryptically that Ireland was willing to "explore alternatives" in return for a cut in the interest rate -- but he would not specify what those alternatives might be.

However, a day after he reportedly had a "good conversation" with Mr Noonan, the German finance minister stated unequivocally that Ireland's corporate tax issue was still firmly on the agenda.

Yesterday, Wolfgang Schaeuble said there was "no willingness" to cut the interest rate on the bailout loans "if Ireland, for its part, doesn't want to make any changes" to its corporate tax rate of 12.5 per cent.

In the Sunday Independent today, the former Minister for Justice, Michael McDowell, has raised the prospect that the Government may be preparing to execute what would amount to be an extraordinary climbdown -- and capitulate on the issue of corporation tax.

Mr McDowell writes: "I hope that we are not seeing the beginnings of a Government back-down on this issue. This is a matter on which the Government must be monitored very closely indeed."

Last night, a spokesman for the Taoiseach, Enda Kenny, insisted: "Corporation tax was not and is not on the table. The Germans are looking for a gesture but corporation tax is not up for discussion."

But Mr McDowell writes: "I hope that I am not too wary. I heard Michael Noonan say on TV on Friday that the Irish corporate tax rate was a 'vital national interest' on which there would be no give. I wholly agree.

"Should I feel reassured? When Enda Kenny said last month that the Common Consolidated Corporate Tax Base was 'harmonisation by the back door', I was reassured. But Noonan didn't mention the CCCTB in his reported remarks."

The issue is expected to come to a head at the next meeting of the Council of the European Union in Brussels in June, when EU governments take legal steps to enlarge the lending capacity of the bailout fund.

The Government is seeking agreement to cut the interest rate on Ireland's bailout loans before it draws down money for the next recapitalisation of banks here.

If Ireland holds firm against the German-Franco demand to harmonise the corporation tax rates across Europe, it seems at this stage that the bailout loan interest rate will not be cut.

Yesterday, the internationally renowed economists Joseph Stiglitz and Michael Cragg said the IMF and ECB were lending money to Ireland to ensure that taxpayers here bail out bank bondholders, but that they had "little concern for economic growth and welfare" (in Ireland).

They warned that Ireland would be in "partial indentured servitude for as far as the eye can see", devoting 10 per cent or more of what the country earns to pay off what are largely the "consequences of the financial sector's misdeeds".

A Sunday Independent/ Quantum Research poll has found that, in general, the public has reserved judgement on the efforts of the Government so far to tackle the banking and economic crises.

However, the poll has also found a massive two-thirds (74 per cent) believe that German banks, in particular, should accept some of the blame for Ireland's current economic position.

The poll has also detected what could be referred to as the stirrings of Eurosceptism among the people: 66 per cent said they were not Eurosceptic, but more than a third (34 per cent) now describe themselves as sceptical about the European project.

Of those who now describe themselves as Eurosceptic, almost half (49 per cent) ascribe disenchantment with Europe to issues related to the EU-IMF bailout, rather than to longstanding issues related to national sovereignty.

There were indications from Germany last week that the position being adopted by Chancellor Merkel is to be questioned.

The former German foreign minister, Joschka Fischer, said: "Under the Europe-sceptic Angela Merkel, Germany has ditched its European vocation in favour of a blatant leadership claim of a European Germany in a German-influenced Europe."

And the German philosopher, Professor Jurgen Habermas, said: "I don't see in this a master plan, but a bit of the reality is being kept from view. Ireland could have gotten away well if Brian Cowen had said, 'We will save Irish banks, but English banks and German banks are not our problem.'"

At governmental level, however, the German position is hardening. Speaking to reporters at the end of a two-day meeting of EU finance ministers in Budapest yesterday, Mr Schaeuble said: "With Ireland, the rescue package conditions were agreed at the end of last year.

"If Ireland wishes to change the conditions, which was an issue discussed at the meeting of the heads of government on March 11, then Ireland must, in a similar way to Greece, make suggestions as to what it can do for its part.

"If Ireland, for its part, doesn't want to make any changes, then there is no willingness on the side of the governments to make changes."

The German finance minister added: "It is an important step that we in Europe, also on the basis of the proposals of the German chancellor, try to establish a common approach to calculating corporation tax. It's a step in the right direction."

Sunday Independent