The Republic should consider increasing its 12.5 per cent corporate tax charge if the EU guarantees that it can keep its rate below those of Europe's main industrial and financial powers, a leading tax adviser told a conference yesterday.

Mr Paul McGowan, tax partner with KPMG, warned the Finance Dublin conference that once the EU expanded this year, powerful, high-tax economies like France and Germany would face a crisis that could in turn force a debate on tax harmonisation.

"When Ireland, Luxembourg, Cyprus, Malta and the other accession states simultaneously attack the job market and tax revenues of the high-tax states and these states are not permitted to defend themselves, will matters reach breaking point?" he asked.

"Now that we are no longer the cheapest or the lowest tax state in Europe, and now that a crisis situation may develop for high-tax states, would it be wise for Ireland to reconsider its position on tax harmonisation?

This may sound like treason, since our economic development has been based on tax disharmony with the EU. "But Ireland's vital interest is not in tax disharmony or in tax sovereignty," Mr McGowan argued.

"Ireland's vital interest lies in being permitted to have a significantly lower corporation tax rate than the main industrial states and financial centres in Europe."

He suggested that it might be in the country's interest to agree a minimum corporate tax level if, in return, the EU guarantees not to question the rate the State charges for 25 years.

"If the rate we negotiate is the lowest permitted in the EU, what we would have done is ensure that we ourselves cannot become the victims of tax competition," he said. "Should we contemplate a future rate of 15 per cent with a guarantee that we were the lowest rate in the EU?" he asked.

Mr McGowan also pointed out that there was confusion in the State's existing corporate tax regime - a 12.5 per cent rate applied to trading income, while there was a 25 per cent rate imposed on "other income".

He argued that the distinction between trading and passive income was a grey area, particularly in financial services. He questioned whether this uncertainty was keeping out the high-value industries that the State has been trying to attract.