Ireland faces corporation tax showdown

Ajai Chopra, left, deputy director of the European Department of the IMF and a colleague pass a beggar as they make their way to the Central Bank of Ireland for crucial talks with the Irish government in Dublin

French and German officials are pressing Ireland to increase its low corporate tax rate in return for an aid package, setting the stage for a showdown over a policy long resented by Dublin’s European partners.

Ireland views the corporate tax rate, set at 12.5 per cent, as the cornerstone of its industrial policy. On Thursday Irish officials reiterated their determination to protect it. “It’s non-negotiable,” Mary Coughlan, the deputy prime minister, told parliament.

French, German and European officials told the Financial Times that the tax rate had emerged as a major point of contention as negotiators from the European Union and International Monetary Fund arrived in Dublin to discuss a potential bail-out.

One European official involved in the talks said that the corporate tax increase would be a casus belli with the Irish, and that Dublin’s strident objections could well keep it out of any final package.

Irish officials are convinced there are other measures they can take to rein in the deficit. European officials do not think Dublin has many alternatives.

A French official said the low corporate tax rate was seen by some elsewhere in Europe as “almost predatory”. “They need lots of money and we note they have a corporation tax rate that is very low,” the official said. “Supply must follow demand.”

“Without an increase in tax intake, the deficit can’t be reined in,” said a German government official, though he added that the size of any corporate tax increase had yet to be discussed. “That depends on [Ireland’s] financing needs, which are still unclear.”

The standoff demonstrates how politically explosive the negotiations have become, with Ireland fiercely defending its sovereignty and potential lenders seeking concrete assurances that their aid will be repaid. Ireland’s central bank governor said Dublin was “definitely likely” to ask for a loan totalling “tens of billions” of euros.

“We’re an island nation in a larger grouping [of nations],” said Danny McCoy, head of IBEC, the Irish business lobby. “We set up our [tax] structures in a way that facilitates our people to do the best for themselves. That’s true sovereignty. And to put pressure on us to change is ill-advised. It will not help us solve the problem. It certainly won’t put the bond markets at ease.”

Olli Rehn, the EU’s top economic official, has implied that he backs a corporate tax rise, saying Ireland should no longer consider itself a low-tax nation.

“The IMF, ECB and European Commission must realise that any increase in our corporation tax rate would ultimately make us more economically dependent, not less so on our European Union partners,” said Peter Keegan, Ireland country head for Bank of America Merrill Lynch.

Additional reporting by Tony Barber and John Murray Brown in Dublin and Robin Harding in Washington