October 5, 2010 / 3:54 PM / 9 years ago

Euro zone pressing Ireland to raise business tax

* EU peers quietly pushing Ireland on corporate tax

* Dublin says iconic 12.5 percent rate to stay

* Fiscal sovereignty sensitive after Lisbon treaty vote

By Julien Toyer

BRUSSELS, Oct 5 (Reuters) - Euro zone policymakers are quietly but firmly pressing Ireland to raise its low corporate tax rate, a magnet for investment, as it struggles with an ever larger bill for sorting out its stricken banks.

The issue is sensitive because the Irish were promised when they voted in a second referendum last year to approve the EU’s Lisbon Treaty that their tax sovereignty would remain intact.

However, as Dublin’s public debt balloons and its deficit hits record levels, raising the possibility it may need a euro zone rescue, EU peers have told Finance Minister Brian Lenihan he needs to raise revenue as well as cut spending.

“Ireland is not going to be in the coming decade, it’s a fact of life that after what has happened, Ireland will not continue as a low-tax country but it will rather be a normal tax country in the European context,” EU Economic and Monetary Affairs Commissioner Olli Rehn said last Friday.

That prompted the Irish Finance Ministry to rush out a statement saying the “the government has always made it clear that the corporation tax rate will remain at 12.5 percent,” and calling it “a cornerstone of the Irish industrial policy”.

Dublin’s rate is the lowest in the European Union except for Bulgaria and Cyprus, which apply a 10 percent corporation tax. Even Baltic tiger Latvia charges businesses 15 percent.

Belgian Finance Minister Didier Reynders said he and other ministers had explicitly mentioned the corporate tax rate after Dublin announced last week that the bill for cleaning up its banks could be up to 50 billion euros ($68.86 billion).

FISCAL CONSOLIDATION

Publicly, EU ministers are stressing that it is up to the Irish government and people to decide how to achieve the necessary fiscal consolidation.

It was not up to the EU to recommend any tax rate, Reynders said: “If it’s possible that the corporation tax level is better for job creation, then it’s better to stay with that, but if you need to go back to balanced budgets, you need to reform expenditure and taxation.”

Another participant said the French and German finance ministers, who long accused Dublin of fiscal dumping by using a low rate to lure foreign business while profiting from EU regional aid, had also pointed to the corporate tax rate.

Diplomats quoted non-euro Swedish Finance Minister Anders Borg as telling Ireland in the closed door-session that it was suffering from a shortage of tax revenue.

“The Swedish minister said Ireland had a lack of fiscal revenue. I don’t get the impression that many (ministers) disagreed,” one EU diplomat said.

“The Irish gave signals that they understood the message.”

Lenihan has promised to submit a detailed 4-year plan to Brussels for tackling the worst deficit in the EU early next month after two years of grinding austerity in which public wages and pensions have been cut.

Diplomats said the European Commission would be closely involved in helping to draft the programme.

In the decade up to 2006, Ireland’s strategy of attracting foreign direct investment with a super-low corporate tax rate helped create 1 million new jobs, sucked in immigrants and raised incomes.

However, it also fuelled a construction and property boom that burst when the global financial crisis arrived in 2008, threatening to bring down Irish banks that had lent recklessly.

Taxpayers now face the bill for those years of excess, but the corporate tax rate has so far remained taboo, even as income and consumption taxes have been raised.

additional reporting by Jan Strupczewski; writing by Paul Taylor; editing by Peter Millership

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