Vol. 510 No. 4
19 Mr. B. O'Keeffe asked the Minister for Finance the progress, if any, made in agreeing a package for harmonising tax and eradicating others which are considered harmful to competition; and his views on whether this harmonisation package would affect the attraction of industry to Ireland. [22183/99]
In December 1998, the Vienna European Council called for agreement to be reached on a tax package by the Helsinki Euro pean Council in December 1999. This commitment was reaffirmed at the Cologne Summit in June 1999. The three key items of the tax package are: a code of conduct on business taxation; proposals for a directive on the taxation of income from savings; and proposals for a directive on the taxation of interest and royalty payments between companies.
A key element of the tax package is the code of conduct. The code of conduct is a political agreement designed to curb harmful competition in business taxation. It focuses on national tax measures which have a significant effect on the location of business within the Union and which provide for a significantly lower effective rate than the rate generally applying in the member state in question. Such measures, be they applied by law, regulation or administrative practice, are regarded as potentially harmful under the code. Measures which are found to be actually harmful under the code are to be rolled back over a period of up to five years, though a longer period may be allowed in certain circumstances. There is also a "standstill" clause whereby member states agree not to introduce any new harmful measures.
The code of conduct does not define what is harmful as such, but it sets out various criteria by which measures are to be evaluated, including whether the tax benefits are confined to non-residents and ring-fenced from the domestic economy, whether the benefits are granted without substantial economic activity taking place and whether there is a lack of transparency. The code suggests that member states should aim to adopt principles targeted at abolishing harmful tax measures on as broad a geographical basis as possible.
The code of conduct does not apply to general tax rates such as the 12.5 per cent corporate rate and the transitional provisions being put in place to move from the 10 per cent rate of corporation tax to the 12.5 per cent rate are fully consistent with the code.
Discussions are continuing on the code with a view to meeting the deadline for a report to the Helsinki European Council and progress has been made in delineating the main issues to be resolved. Improving tax policy co-ordination in the European Union, which Ireland supports, is not to be confused with harmonisation of tax rates which is not on the EU agenda. This was confirmed at the Vienna European Council, the agreed conclusions of which stated that "co-operation in the tax policy area is not aiming at uniform tax rates and is not inconsistent with fair tax competition, but is called for to reduce the continuing distortions in the Single Market, to prevent excessive losses of tax revenue or to get tax structures to develop in a more employment-friendly way".
Does the Minister agree the 10 per cent rate of corporation tax, which will increase to 12.5 per cent in the near future, has been one of the instruments of policy which has led to the industrialisation of modern Ireland? Does he also agree there is a great deal of confusion regarding the various directives governing the harmonisation of taxation practice which are being discussed in the run-up to the Helsinki meeting? Will the Minister give an assurance to those who invest in Ireland and to the wider Irish business sector that there is nothing on the horizon in Europe which runs counter to our national policy of introducing a corporation tax rate of 12.5 per cent and of maintaining it for the foreseeable future?
I agree with Deputy Noonan's assertion that the 10 per cent rate of corporation tax has been one of the key determinants of Irish economic success in recent decades. It has been a major component in attracting foreign direct investment to Ireland. Some foreign commentators would like to give the impression that it is the main reason for Irish economic success, but I am sure Deputies on all sides agree this is not the case.
The Deputy's second question related to tax harmonisation. At the ECOFIN Council meeting on 1 December 1997 we agreed to resolve three matters within three years, namely, to formulate a code of conduct on business taxation, to progress the tax and savings directive and to deal with the interests and royalties directive. These three items were regarded as part of the same package.
We have had considerable difficulty recently in moving forward on the tax and savings directive. A meeting on this matter took place earlier in the week and no progress was made. We will strive to ensure it is dealt with at the Helsinki Council, but if last Monday's meeting is indicative, we will have considerable difficulty in this regard.
The code of conduct on business taxation does not refer to harmonisation, it relates to distortion of the marketplace. As stated in the last part of my original reply, the agreed conclusions of the Vienna European Council specifically stated that it does not mean harmonised tax rates.
Deputy Noonan's final question related to assurances regarding the future. There is nothing on the immediate horizon to place in jeopardy Ireland's move to a 12.5 per cent corporation tax rate for all new operations on 1 January 2003, as agreed by the Commission. When the code of conduct report is published, it will list that rate but since we have agreed this procedure we will face no difficulties. I can give an assurance in that regard to companies that wish to establish operations in Ireland.
As stated previously, it is my view that, for a number of years, the entire focus in Europe has concentrated on Ireland and its low 10 per cent rate. Recent budgets introduced by other European Finance Ministers recognise the folly of having high corporation tax rates and they are considering reducing them. More than 18 months ago I stated that Europe would move more towards the Irish position. That said, however, I doubt whether some member states will discontinue the practice of raising the question of tax harmonisation in the future. Despite what I said earlier, some countries, for ideological and other reasons, desire the introduction of harmonised tax rates.
I do not believe unity will ever be achieved among members of the European Council regarding the harmonisation of taxes. I predict the emphasis will lie in the other direction. There are some countries which will not give up the idea of harmonisation.
