Ireland’s corporate tax in EU-IMF firing line

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Ireland insisted yesterday (18 November) that its low rate of corporation tax was "non-negotiable" as it discusses an aid package worth tens of billions of euros from European partners and the IMF for its shattered banks.

Eurozone neighbours are pressing Ireland to raise the 12.5% corporation tax rate as part of negotiations for a rescue package but Dublin is resisting, arguing that it is crucial for foreign investment.

Irish Deputy Prime Minister Mary Coughlan told parliament the corporate tax rate was "non-negotiable".

European Minister Dick Roche echoed that comment, saying "it is certainly not up for negotiation".

"There has been some very unhelpful chatter in the background in the last few days about our corporation profit tax. Where would be the sense of destroying one of the great drivers of growth?" he told BBC television.

Britain and Germany have long viewed low Irish taxes as a form of unfair competition and the finance ministers of Austria and France said the corporation tax may have to be raised as part of any deal.

Michael Meister, a deputy leader in parliament and finance expert for Angela Merkel's Christian Democrats (CDU), said the country needed to consider raising the levy.

"The Irish rates are below the European Union average," Meister told Reuters on the sidelines of the CDU annual party congress on Tuesday (16 November). "I therefore see here at least a possibility, given the high [Irish] budget deficit, to improve revenues without causing a negative impact on growth," he added.

Meister's comments come one day after Elmar Brok, a senior CDU lawmaker who has sat in the European Parliament since 1980, said Ireland may have no choice but to raise the rate. "Ireland has two options to consolidate its budget – cut expenses even further or increase taxes like the corporate tax rate," Brok said at the congress in Karlsruhe.

EU-IMF mission

Officials from the European Commission, the European Central Bank and the International Monetary Fund visited Dublin on Thursday for talks on a possible rescue package.

"We're talking about a very substantial loan for sure – tens of billions, yes," Central Bank Governor Patrick Honohan told state broadcaster RTE, acknowledging substantial outflows of funds from the Irish banking sector since April.

The government said discussions would run into next week and Finance Minister Brian Lenihan told parliament Dublin was not yet at the point of requesting a loan.

What was under discussion was "substantial contingency capital to be made available to back Ireland".

He insisted the IMF and EU would not have any input into Ireland's budgetary measures, even though EU rules stipulate that assistance programmes can only be granted to governments that sign a strict fiscal conditionality agreement.

After 10 days of losses, European stock and bond markets and the euro rebounded on expectations Ireland would become the second eurozone country after Greece to receive a bailout to cope with high debts and deficits.

That helped dampen fears of contagion from Ireland to other highly-indebted eurozone members.

EU sources have told Reuters Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

Four-year austerity plan due next week

Lenihan is due to detail a four-year, 15 billion euro budget-cutting plan next week and the government will put a 2011 austerity budget to parliament on 7 December.

Greece pledged to raise its Value Added Tax, freeze pensions and cut government waste further in 2011 to meet the terms of its EU-IMF bailout after admitting it will miss this year's deficit reduction target.

Some analysts said the Irish government was playing for time to avoid applying for aid before a key 25 November by-election that could reduce its parliamentary majority to just two seats.

Ireland has said the bill for cleaning up its banks could top 50 billion euros but investors fear the final figure could be even higher given rising residential mortgage arrears, deposit outflows and higher funding costs.

Britain, whose banks have around $150 billion of exposure to Irish debt, has said it stands ready to help. Prime Minister David Cameron told parliament London could provide bilateral assistance or join an EU mechanism, or both.

(EURACTIV with Reuters.)

 

Ireland's borrowing costs shot to record highs in the past week on concerns over a deficit set to hit 32% of gross domestic product this year and growing borrowing costs.

This has triggered fears of a Greek-style scenario where budget problems in one country plunge the entire euro zone into crisis.

Irish Prime Minister Brian Cowen has been reluctant to seek help on Ireland's sovereign debt, apparently hoping passage of a 2011 austerity budget early next month will avoid the need for a bailout.

However, countries on the euro zone's periphery, such as Spain and Portugal, are growing impatient as their borrowing costs have spiralled as a result of Ireland's troubles.

  • 22-26 Nov.: Ireland to present four-year, 15 billion euro budget-cutting plan.
  • 7 Dec.: Government to put 2011 austerity budget to parliament.

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