Member states agree to curb ‘predatory’ tax breaks

Date: 26/06/1997

By Tim Jones

GOVERNMENTS have given the go-ahead for a voluntary 'code of conduct' to be drawn up in a bid to end predatory tax competition between member states.

If the code is agreed in principle at an informal meeting of finance ministers in September, it will be the most extensive measure of tax harmonisation ever attempted by the Union.

Internal Market Commissioner Mario Monti's staff have set themselves a mid-July deadline to complete the guidelines, and Luxembourg Prime Minister Jean-Claude Juncker will hold a first political discussion of their contents at an informal meeting of finance ministers in Mondorf-les-Bains on 13-14 September.

The move follows a gathering last week of Monti's high-level tax group which gave its support to a preliminary draft of the code.

This provides for a 'stand-still' in the introduction of new tax breaks specifically designed to entice corporate investment from one member state to another.

The new code will amount to a voluntary commitment by member states to use 'fair' fiscal measures and stop luring valuable capital investment and jobs away from their neighbours. All member states agree, at least in theory, that these practices are not tolerable in a single market.

The Irish authorities, long criticised for imposing a mere 10&percent; corporation tax rate on specific high-value manufacturing, have just announced plans to raise this rate to 12.5&percent; and apply it across the board - a move welcomed by Monti.

At last week's meeting, government officials supported the proposal for a system of 'peer review' to judge whether new tax incentives to investment were acceptable or predatory, but asked for more details on how it would work. “This applies particularly to the idea of 'roll-back',” said an official.

Governments have to decide which institution should be the clearing house for new tax measures and, after that, how existing provisions should be rolled back. “The trouble is that if we just decided to look at all existing measures, then we would be inundated,” said one official. “Something more discriminating will have to be devised before that happens.”

Greater consensus was found on how to define 'harmful' when assessing a tax break.

Most negotiators agreed that a series of measurements of harm should be established, including how much would be shaved off a company's tax bill compared with the normal corporate tax rate and whether discrimination between residents and non-residents was flagrant.

The main surprise at the high-level group meeting was the attitude of the new British government.

Unlike her Conservative predecessors, Treasury Minister Dawn Primarolo acknowledged the problem of unfair tax competition and supported the idea of establishing a voluntary code.