German finance minister urges fairer tax competition within EU

The problem must be seriously discussed and a solution found, he added. The German minister said the tax cuts in some EU countries were partly financed by Berlin’s contribution to the EU's coffers.

EU heads of state and governments agreed earlier this month on how to finance the EU from 2007-2013. Germany will continue to contribute large amounts to the common coffers, from which the eastern EU member states benefit.

"It cannot be, that some countries demand more funds from the EU budget while on the other hand failing to improve their own tax basis", Mr Steinbruck said.

The combined corporate tax rate in Germany is almost 40 percent, while it is much lower in a number of countries. Slovakia has imposed a 19 percent flat tax in order to attract business and create more jobs.

Germany’s new coalition government had planned to raise VAT to 19 percent in 2007 in a bid to narrow the country’s budget deficit which is exceeding the levels set by euro zone criteria.

The coalition of Social Democrats and Christian Democrats have also agreed, that EU member states competing on lower taxes should have their funds from EU regional funds cut.

German industry not convinced

But German industry did not back the minister in his crusade to ensure what he considers fair tax competition in the EU.

Tax expert Klaus Braunig from the Federation of German Industries (BDI) said the government would do better by ensuring that German tax rates are internationally competitive.

"There is no guarantee that business will stay in Germany or move in, if other EU countries were forced to raise their tax levels", he noted.