Harmful tax schemes are widespread throughout the 10 countries due to join the European Union next year and Poland, Lithuania and Malta have not done enough to phase them out, the European Commission has concluded.
In an internal report to EU governments, the Commission argues that all of the new members, except Estonia and Latvia, have corporate tax breaks that could frustrate the EU's internal market by diverting revenue and investments.
The report, dated June 5th, highlights an alleged lack of transparency in Poland and Lithuania's low-tax "special economic zones" and schemes in Malta that could be used by companies avoiding tax elsewhere.
The European Commission asks governments of member-states to draw up a definitive "list of harmful measures of each acceding state to enable the respective countries to take the appropriate steps to roll back their harmful measures at the latest upon [their formal\] accession" to the European Union on May 1st, 2004.
The EU has lost its chief source of leverage to ensure its new members speedily comply, since it reached a binding deal with the 10 new entrants at a summit in Copenhagen last December.
The EU's present members have established a voluntary code against unfair business taxation that has targeted "harmful" practices, ranging from tax breaks for business "co-ordination centres" in Belgium to fiscal incentives in southern Italy.
However, enforcement of the regime often depends on individual countries' goodwill or state-aid cases introduced by the Commission that may take years to conclude.
The Commission identified one harmful tax measure in the Czech Republic, nine in Cyprus, two in Hungary, three in Lithuania, seven in Malta, two in Poland, five in Slovakia and one in Slovenia.
Many countries have agreed to phase out special deals for offshore companies or to clear up rules for investment promotion schemes, but the Commission notes that Poland disagrees with its assessment of its 14 special economic zones.
The country has already revised the rules to allow Polish companies to benefit as well as foreign companies and to cap tax breaks at 50 per cent of costs.
"We have no complaints from the Commission and the Commission has no problems with any of the enterprises set up in the zone," according to Ms Danuta Hubner, Poland's Europe minister, yesterday.
"This was all agreed at the Copenhagen summit, when the enterprises were given long transition periods," she continued.
However, the Commission is worried that the government and the zones' management retain too much discretion over granting permits.
It argues: "The measure is not fully transparent and it is not quite clear yet if non-residents predominantly will use the measure."
The Commission cites estimates that the schemes will produce 61,000 jobs and says that two-thirds of investors are foreign, mainly from Germany, Japan and the US.
It is also concerned about a similar scheme in Lithuania, which has granted a licence to only one company, along with programmes in Malta that offer tax breaks for "international" companies.
