Europe's company tax harmonisers may go it alone

European Diary: Michael Perkins can't claim much job satisfaction at the moment

European Diary: Michael Perkins can't claim much job satisfaction at the moment. The Irish diplomat responsible for tax policy in Brussels has to attend regular meetings on behalf of the Government on the sensitive topic of creating a common EU corporate tax base.

Ireland is implacably opposed to introducing a harmonised set of rules for judging what corporate income can be taxed, and at each meeting Mr Perkins must stand up and put on the record its opposition to the European Commission's tax proposal. He is not alone.

The British and Slovakian diplomats also rise at various points during the tax working group meetings to express their opposition to the plan, which promises to be one of the most controversial EU proposals debated in recent years.

Last week tax commissioner Laszlo Kovacs published an update on his plan to create a common corporate tax base, promising that it would provide transparency for multinational companies operating across EU borders, improve competitiveness and significantly reduce compliance costs for firms calculating their tax burden.

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"One of the reasons for the poor competitive performance of the EU, which is lagging the US, Japan and China is that there are 25 different tax systems," said Mr Kovacs, who insists that he has no plans to propose a single corporate tax rate.

The problem is that a growing number of finance ministers do not believe him. Last Wednesday Mr Kovacs said three countries were hostile to the plan, but by Friday he admitted that anywhere up to 10 member states had reservations.

Even his commission colleague, Charlie McCreevy, has warned that creating common rules on collecting corporate tax is equivalent to tax harmonisation "by the back door".

At a meeting of EU finance ministers in Vienna at the weekend Minister for Finance Brian Cowen sought to kill off Kovacs's plan.

In a robust presentation to his 24 EU colleagues, Mr Cowen described the initiative as "a very interesting academic exercise" that would only serve to undermine national sovereignty.

In a side swipe at the commissioner, he suggested that Mr Kovacs works on more pressing tax matters.

Defending our 12.5 per cent rate of corporation tax has been a mainstay of Irish policy in the EU for at least a decade. Indeed, one of the big fears of the Government in the current debate over whether to amend the EU constitution is that it could lead to the erosion of a specific commitment in the treaty to retain national sovereignty over tax matters.

So it will not have come as any surprise to EU finance ministers to see Mr Cowen's intervention in a round table discussion to try to halt work on Kovacs's plan. In the end, Mr Cowen failed in his bid with ministers from powerful states such as France and Germany strongly supporting the initiative and the current EU president Austria also throwing its weight behind the measure.

But the meeting did create some momentum behind Ireland's campaign.

Britain, Slovakia, Lithuania, Estonia, Latvia, Malta, Slovenia, Cyprus are all lining up against the proposal, suggesting a very difficult and divisive debate in coming months. But to write off the harmonisation proposal would be premature, particularly since Mr Kovacs has said that he will play a trump card, so-called "enhanced co-operation".

This mechanism enables a number of member states to move ahead together in co-operating more closely on matters covered by the EU treaties while leaving remaining countries outside their core group.

It was introduced into EU law to remove the veto of individual states, except in foreign affairs, and to reduce the number of states required to launch the procedure from a majority 13 to eight countries. It has not been used up until now.

But it seems likely that with the support of powerful states such as Germany and France Mr Kovacs's tax base proposal could be the issue that kickstarts its use.

"My approach is to tackle the more ambitious goal first, rather than giving up right away," said Peer Steinbruck, the German finance minister, when asked about employing enhanced co-operation versus full harmonisation among all 25 states.

But sometime next year it seems likely that the tax experts from member states against the proposal, such as our own Michael Perkins, will give up their current watching brief at the tax working groups.

It could even happen sooner than this, with finance ministers scheduled to debate the issue in June. Then the EU will begin sailing through unchartered waters with the prospect of a two-speed Europe emerging.

Ireland will hope that its corporate tax rate of 12.5 per cent will override the simplicity offered by member states that choose to harmonise their tax base.