THE announcement of a 12.5 per cent corporation tax rate on trading income from January 1st, 2006, provides the certainty regarding tax policy which Ireland needs to attract new projects, retain those we have, and help our domestic economy to plan ahead.

The new regime differs from the 10 per cent rate introduced in 1980 in that the new reduced rates are to apply nationwide, and to all forms of trading income (at the 12.5 per cent rate) and other corporate income (at the 25 per cent rate). They are not confined to specific areas such as Shannon, or to specific industries such as manufacturing, or financial services in the IFSC.

Because the new tax rate is nationwide and not specific to any industries it should not meet objections under EU rules.

Inevitably this major tax change is accompanied by some other changes, intended to make good any loss of revenue. These changes are principally:

. elimination of tax credits on dividends;

. reinforcing surcharge on undistributed corporate investment and professional income, and possibly other income;

. unspecified targeted measures "aimed at maintaining the existing revenue yield from those sectors benefiting most" from the new reduced rates;

. reduction of business tax incentives.

The Government is committed to a process of consultation before finalising the measures. Consultation is vital because the thinking behind some of these proposed "clawbacks" of tax benefits may be a little confused.

If the new reduced rates are intended to offer Irish industry a competitive advantage, why should the benefits of the reduced rates be clawed back from companies by "targeted measures"? If the size of corporate taxable profits remained unchanged, such a clawback might be necessary. But if the incentives have their desired effect of leading to rapid growth in the size of our economy, surely the increased tax take that would result from that extra growth should more than pay for the reduction in tax rates?

The 10 per cent tax rate did not cost the State any lost revenue - rather it has raised many times the revenue than our former high tax rates could possibly have raised. The proposal to clawback the benefits of the reduced tax rates appears to be based on a static view of the economy, rather than on faith in a dynamic model.

The Government announcement correctly stated that "the services sector is forecast to yield the greatest employment growth in the future". This appears inconsistent with a proposal to strengthen the additional 20 per cent surcharge on retained family company income. The surcharge currently applies in particular to professional income. It is important that any new measures do not extend the surcharge to other service income.

A rapid growth in employment is not going to be achieved without permitting capital to be built up within employer companies. If entrepreneurs are willing to leave their money inside service companies it seems illogical that the tax code should punish them for doing do.

However we should not be nit picking at this time. We should not lose sight of the principal point. We now have a headline corporate tax rate with which we can compete for projects worldwide. We have a corporate tax rate which should give a decisive cost advantage to Irish firms to compete in markets at home and abroad.