The European Commission could demand the abolition or restriction of the controversial tax free status of stud farm fees unless the Government can show how it can be made comply with EU law.
The Commission said yesterday that it believed the stallion exemption was a state aid that should have been notified to Brussels under EU rules. "We never ask for information if we don't think it's a state aid. If we investigate it is because we believe it is a state aid," a spokesman told The Irish Times yesterday.
The Minister for Finance, Mr Cowen, confirmed to the Dáil yesterday that the Commission has written to the Government saying it has come to a preliminary conclusion that the stallion tax exemption seems to constitute a state aid, which is not compatible with European single market rules.
Earlier this week Mr Cowen told the Dáil that he had not received any letter. Yesterday he corrected this, saying that when he spoke he had not been aware of the letter from the Commission Directorate General for Agriculture and Rural Development.
"The letter sets out the Commission's reasoning," according to Mr Cowen, "and, against this background, invites Ireland to submit its comments within one month, together with any concrete proposals regarding how the scheme in question could be brought in line with Article 7 of the EC treaty.
"My Department is examining the letter and will arrange to meet the Commission. This matter will require taking legal advice. We have sought an extension of the one-month deadline which I believe will be granted." Once the Government responds to the commission's latest request for information, officials at the directorate general will evaluate the case and advise the commission on what action to take.
The final decision on how to proceed will be taken by all 25 commissioners including Ireland's Mr Charlie McCreevy.
Although Mr McCreevy is not directly responsible for state aid issues, his brief as internal market commissioner is to remove obstacles to free trade within the EU. Senior Department of Finance officials said yesterday that this process is unlikely to be completed quickly, although they could not estimate how long it would take. The process "tends to be long rather than short", said one. "Anything that happens won't be overnight."
If the Commission confirms its preliminary finding that the scheme constitutes a state aid it must then determine if the Government should have notified Brussels about it.
The Commission could ask the Government to restrict the scheme or make it more transparent.
Alternatively it could order the Government to recover taxes that were avoided due to the exemption.
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