A German government spokesman said Ireland should be allowed to determine its own corporation tax rate, despite recent pressure from a senior finance expert in Chancellor Angela Merkel's party.
Ireland needs billions of euros to cover its huge debt
Government spokesman Steffen Seibert Friday countered statements made earlier this week by Michael Meister, one of Angela Merkel's senior financial advisers.
Asked whether Germany wanted Ireland to raise its corporate tax rate, Seibert said this was a matter to be decided by the Irish government.
Meister, a deputy leader in parliament and a finance expert for Merkel's Christian Democrats (CDU), said Tuesday Ireland needed to consider raising the levy.
Irish Prime Minister Brian Cowen has vowed to raise the corporate tax
"The Irish rates are below the European Union average," Meister told news agency Reuters on the sidelines of the CDU's annual party congress. "I therefore see here at least a possibility, given the high (Irish) budget deficit, to improve revenues without causing a negative impact on growth."
But at a general press briefing on Friday, Seibert said: "The German government greatly supports the Irish government's policies and has great confidence in the courageous reform policies contained in the four-year program it is expected to present in early December."
Bite the bullet
Dublin's 12.5 percent corporate tax rate, one of the lowest in the 27-nation EU, has been a key part of its economic strategy and crucial to tempting big employers like Google and Pfizer to Ireland.
In the past few years, several international companies have relocated from other European countries to Ireland.
Up until the financial crisis, Ireland had been able to maintain a fairly stable fiscal budget, even with its low corporate tax rate. But Irish borrowing costs have surged in recent weeks, and the country is now under pressure to ask the EU for financial assistance to help cope with its fragile banks.
The Irish banking sector is estimated to have up to 50 billion euros ($68 billion) in debt, with financial experts in agreement that the banks are incapable of covering this amount themselves.
Now there is pressure in Europe to make raising corporate tax a condition of a proposed bailout funded by the EU and International Monetary Fund.
The Irish banking sector has huge debts
Benedikt Zinn, researcher for the Mannheim-based Center for European Economic Research (ZEW), said Ireland's corporate tax rate is unique in western Europe. "Ireland has a corporate tax of 12.5 percent, while for example Germany - if you take together corporate tax, trade tax and so on - you'll end up with 30 percent," he told Deutsche Welle. "Many politicians have said this has kick-started an international tax competition based on companies practically being subsidized by tax breaks. This has profitably brought many companies to Ireland that don't necessarily have substance."
Ireland is now being chided by many European countries that feel unfairly disadvantaged by its tax policy. Some EU leaders believe Ireland should have taken a more moderate economic approach.
Zinn is unsure whether raising corporate tax at the moment is a good idea. "Now with profits down, of course it's difficult," he said. "I'm not sure this would be a wise step. At the moment, raising the tax would probably be damaging because then of course new investment would not materialize."
A 2008 report by the Organization for Economic Cooperation and Development (OECD) said that on average, a one percentage point increase in the effective corporate tax rate leads to a 3.7 percent decline in foreign direct investment.
Meister's comments come one day after Elmar Brok, a senior CDU lawmaker and a member of the European Parliament since 1980, said Ireland may have no choice but to raise the rate.
"Ireland has two options to consolidate its budget - cut expenses even further or increase taxes like the corporate tax rate," Brok said at the CDU conference.
Ireland is relying on exports to help the economy grow by a forecast 1.75 percent next year and has repeatedly said it will not increase the rate it taxes the output of multi-nationals.
"One shouldn't forget that direct taxes are a national concern; the EU has basically no influence on it," said Zinn. "I wouldn't call it a threat to this national freedom, but if there is EU pressure, then it's certainly a way of influencing direct tax policy through the back door."
Author: Ben Knight (Reuters)
Editor: John Blau