Just what is the Government doing about corporation tax? The business sector is a little confused about the talk of the tax moving to 12.5 per cent, or 10 per cent and of the rather unclear threats being made by the EU Commission. The difficulty for the Government - and specifically for Ministers Harney and McCreevy - is that the Government parties promised to reduce all corporation tax to 10 per cent. But the former government had already discussed with the EU Commission the prospect of reducing corporation tax to 12.5 per cent.
The risk now is that opening up the entire discussion again to get agreement on a 10 per cent rate could prove awkward at a time when many of our EU partners are already unhappy with the amount of inward investment we are winning through a combination of grant aid and low corporation tax. So the Government is likely to aim to reduce all corporation tax to 12.5 per cent by 2005, while retaining the "goal" of moving to 10 per cent by 2010.
This would be a neat way of keeping onside with Europe while not completely throwing out the election promises. After all, a few of those promises will have to be quietly forgotten come Budget day. And most sectors of industry, with the exception of the heavily investing pharmaceuticals sector, will be happy enough with a 12.5 per cent rate.
One tricky political question will be how to ensure that the big banks do not experience too big a fall in their tax bills, as the rate of corporation tax to the services sector is cut from its current 36 per cent rate towards 12.5 per cent. How some of this money will be clawed back from the banks is not at all clear.
A key goal for the Government will be not to link corporation tax and our grant aid regime in discussions with Brussels. The EU Commission is also looking at the grant aid we offer to incoming multi-nationals and the last thing the Government will want is for the Commission to say it will OK our corporate tax plans, but only at the expense of much lower grant aid.
Whatever happens, it may well be that grant aid to projects locating in the more prosperous regions of the State, such as Dublin, will have to be reduced in the years ahead.
Already IDA Ireland is discriminating in favour of rural Ireland and still around half of all projects are going to Dublin.
The final part of the EU mix is, of course, what happens to structural funds after 1999. Again, the Government will not want to get this mixed up with talk of tax and grant aid.
Dark threats from Brussels that our EU aid might be cut if we don't shape up on corporation tax look unlikely to be realised. And the Government and IDA Ireland will have been delighted with thundering editorials in the Wall Street Journal and the London Times supporting Ireland's low corporation tax stance. Senior journalists from both papers visited Ireland over the summer.
