IRELAND must be given until 2005 to reduce its general rate of company tax to 12.5 per cent, the Tanaiste and Minister for Enterprise, Trade and Employment, Ms Harney, told the EU Commission yesterday. "We need time," she said.
Despite the rapid growth in the economy, the State still needed a transition period to consolidate the gains of the last few years, she told the Competition Commissioner, Mr Karel van Miert.
The Tanaiste, who was in Brussels for a meeting of industry ministers, took the opportunity for a brief but "very positive and constructive" meeting with Mr van Miert. His directorate is involved in negotiations about the future of the Irish special tax regimes for manufacturing exporters and companies in the International Financial Services Centre (IFSC).
The hand of the Minister was strengthened by the publication yesterday by the Commission's Industry Directorate of a benchmarking study of the Irish and New Zealand economies. The study, which looks at the reasons for the remarkable transformation of both economies, refers approvingly to Ireland's low rate of corporate taxation as a contributing factor.
The report also warns that "efforts for reform only pay off after some time, so that they need to be sustained". "Ireland's corporation tax rate should be seen as part of the solution, not the problem," the Tanaiste argued. But the Minister also insisted that the expansion in Ireland of companies like Boston Scientific was also due to their experience of a skilled workforce that was particularly adaptable to high technology.
The success of social partnership was also a contributing factor, she said.
Ms Harney said that the tax and job subsidy negotiations with the Commission would begin in earnest on Monday when the Secretary of her Department, Mr Paul Haran, would be coming to Brussels. The key issue for the Commission is the rate of tax to be paid by companies coming to Ireland after 2000, with Mr van Miert insisting that geographically or sectorally-focused differential company tax rates were no longer acceptable.
Yet to bring the general rate of 36 per cent down to 12.5 per cent would cost the Government £400 million a year in lost revenue. Reduction to 10 per cent would cost a further £250 million a year. Ms Harney insists that it will take until 2005 to do so without damaging the economy. The Commission's willingness to accept the continuation of special regimes is understood to hinge on speeding up the process.
Asked if there was a possibility of a significant move in that direction in the Budget, Ms Harney said that the detailed priorities of the Budget would be agreed later in the week at a meeting between herself, the Taoiseach, and the Minister for Finance. "But clearly workers have to get tax breaks too," she said. "As we move corporation tax down, we will also have to bring down tax for workers. And we have the ability to do both." Ms Harney welcomed the decision of industry ministers to reform the state aids system. The Commission's proposal, approved by the meeting, was to remove from its jurisdiction state-aid payments to small- and medium-sized enterprises of less than £16,000 over three years and payments to companies for training and research.
The aim is to allow the Commission to focus its limited resources on the subsidies to large industry which are having a real effect on competition. Ms Harney said the reform would make the system more rigorous and transparent. Large countries "can almost write blank cheques" which could not be matched by countries like Ireland, she said.
