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October 04, 2010
Rehn predicts end of Ireland's low-tax regime
With its record budget deficit, Ireland will not be able to keep its low taxes and will become a "normal tax country in the European context," economic affairs commissioner Olli Rehn said Friday (1 October), prompting an angry response from large American corporations based on the island.
"It´s a fact of life that after what has happened, Ireland will not continue as a low-tax country but rather it will become a normal tax country in the European context," Mr Rehn said at a press conference following an informal meeting of finance ministers.
He was answering a question regarding the inclusion of Ireland´s rate of corporation tax in efforts to increase tax revenues. But he also stressed that the matter was for the government and parliament to decide.
Ireland is struggling to reduce its budget deficit to 3 percent of its gross domestic product by 2014, after it emerged that bank bailouts have widened the public deficit to a massive 32 percent of GDP.
Under the rules of the eurozone, the defiict has to be kept below 3 percent, but the financial and economic crisis has seen most countries surpass that threshold.
Dublin´s favourable tax regime for big corporations - currently only 12.5 percent - will remain "a cornerstone of Irish industrial policy," a spokesman for the ministry of finance told Dow Jones news wire.
His comments came after the American Chamber of Commerce in Ireland urged Prime Minister Brian Cowen to "categorically rule-out" EU pressure on corporate tax.
"At a time when the economy is in deep recession, nothing which would impact on the continued investment in Ireland by our existing base of multinationals, or would deter new investment in Ireland can be countenanced," the chamber said in a statement.
"This is a very serious issue. We have to realise that we are still way out of line in terms of our cost competitiveness, and Ireland´s competitive corporation tax rate is one of the few competitive advantages we have," it added.
The bulk of the record deficit is due to government bail-outs of the country´s ailing banks, such as the Anglo Irish Bank, still unable to recover from the financial crisis. Competition commissioner Joaquin Almunia said that he was in favour of Ireland asking bondholders in Anglo Irish Bank to share some of the cost of the bail-out.
"This is in line with the Commission´s principles on burden sharing since it both addresses moral hazard and limits the amount of aid, with benefits to the taxpayers," Mr Almunia said in a statement.
EU officials have frequently raised the issue of greater tax harmonisation in Europe, with a recent report by ex-commissioner Mario Monti identifying tax divergences as a damaging factor to the internal market.
Euro doomsday scenario
In addition to Ireland´s woes, other euro-countries such as Spain are heading to a "death spiral" of high unemployment and an economic slump, leaving few chances for the common currency unless Europe does more to help member countries, Nobel Prize winning economist Joseph Stiglitz has said.
In an extract from an afterword to his book "Freefall", published in the Sunday Telegraph, the former World Bank chief economist also said it could only be a matter of time before Spain is attacked by speculators.
"The euro zone needs better economic cooperation, not just the kind that merely enforces budget rules, but cooperation that also ensures that ... when countries experience large adverse shocks, they get help from others," he wrote.
Mr Stiglitz, who won the Nobel prize in 2001, said the euro lacked the institutional support it needed to make it work, but argued the single currency could be saved by the exit of Germany from the euro zone or the division of the euro zone into two sub-regions.
"If Europe cannot find a way to make these institutional reforms, then it is perhaps better to admit failure and move on than to extract a high price in unemployment and human suffering," he said.