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13th Apr 2024

New storm over corporate tax in new member states

French finance minister Nicolas Sarkozy has said that countries rich enough to charge a low corporate tax rate should not be eligible for EU regional funding, again putting pressure on new member states.

Speaking on French state broadcaster TF1 last night, Mr Sarkozy said, "One can't allow in Europe that some countries say 'we're sufficiently rich to lower our taxes' - to as low as zero in some cases - but at the same time ask the countries of old Europe to pay structural funds that we could use for our regions".

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He added, "I will propose that new members whose tax rates are lower than the EU average are no longer eligible to receive structural funds".

Too rich for funds

The European Commission today hit back at the plans. A spokesman for internal market Commissioner Frits Bolkestein said that "this idea that you have to be rich in order to have lower rates on companies is slightly muddled thinking".

He continued, "normally a country has low rates of tax on companies precisely because they are poor relative to their neighbours and therefore need ... to attract inward investment so as to boost their prosperity in the medium-term".

Wounds reopened

Mr Sarkozy's comments are certain to re-open a fierce debate about corporate tax rates in Europe - especially in the new member states which charge companies less than other member states in a bid to attract investment.

France and Germany charge a high rate of corporate tax on companies, with rates ranging from 35 to 40 percent and they fear companies could move their investment to EU member states with lower rates.

Estonia has a zero percent rate for reinvested earnings while Latvia, Lithuania and Cyprus charge 15 percent and Poland 19 percent.

The "old European" countries are therefore pushing for a harmonised minimal corporate tax level in the EU.

German Chancellor Gerhard Schröder said in April that new member states could not "on the one hand destroy their state income with low taxes and on the other hand build up their infrastructure using aid from the EU".

However, many countries - particularly the UK and Ireland - implacably oppose such a move and any change to fiscal laws must be made by unanimity.

Thin end of the wedge?

The issue may arise at the meeting of finance ministers in the Netherlands beginning on Friday (10 September).

French diplomats say that the item is not specifically on the agenda but that the issue could well come up as part of the general discussion on the financial perspectives - the EU's budget from 2007-2013.

The meeting is informal, so ministers can raise any point they wish.

The Commission is in favour of a harmonisation of the tax bases - the way corporate taxes are calculated. But the EU executive believes that the rate member states charge should be left up to individual governments.

"This is a sovereign choice for every member state of the union", said a Commission spokesman.

But critics - especially British critics - believe that harmonising the way taxes are calculated is the first step towards harmonising the rates themselves.

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