Dr Charles Tannock

Member of the European Parliament for London

Slovakia considers pressures on corporate taxation unfair

Slovak Spectator - 13 September 2004

By Beata Balogová

SLOVAKIA'S ambitious tax reforms, much welcomed by the business community, have attracted severe criticism from the French Government.

In a forthright statement, France's Finance Minister, Nicholas Sarkozy, suggested that the new EU member states should receive less financial aid from Brussels if they allow their corporate taxes to fall below the EU average.

"It cannot continue like this," said Sarkozy. I will propose that new member countries that have their taxes under the European average will not be eligible to draw from the EU structural funds."

His outspoken statement has provoked a wave of protest, both from the established member states and the new member countries.

The architect of the Slovak tax reforms, Finance Minister Ivan Mikloš, stressed that the country is merely adopting necessary reforms.

"Slovakia opposes such proposals. Europe needs a larger market, more flexibility and better conditions for firms [to develop]. It seems that Minister Sarkozy wants to find a way to punish countries that are successful in implementing the necessary reforms beneficial for the whole of the European Union," Mikloš told the press.

The Finance Ministry's comments to The Slovak Spectator further considers that the proposal to cut funding for the new members is groundless, because these countries are contributing to the collective European budget, which directly provides the structural funds, just as much as the original 15 member states.

The ministry also argues that Sarkozy's proposal unfairly singles out new members, when some of the formative countries are also registering lower taxes than the EU average, yet Ireland, Great Britain, Portugal, Spain and Greece are eligible for drawing money from the structural funds.

Furthermore, neither the accession agreement nor any other document pertaining to the new EU members, assumes any limitations on accessing structural funding, the ministry claims.

"This step is extraordinarily harmful to the economic interests of the Union itself, it damages competition and worsens the business environment. If this is the way to meet the Lisbon strategic goals [of making Europe's economy the world's most competitive], we can forget about it," Economy Minister Pavol Rusko told news wire TASR.

To add support to Slovakia's stance, the European Commission has also refuted the French proposals, saying that it rejected any links between tax rates and structural funds.

However, Sakrozy's comments are not unprecedented. Swedish Prime Minister Göran Persson and German Chancellor Gerhard Schröder also criticised the new EU members for low taxation in May this year.

Slovakia, however, in its steadfast rejection towards such criticism, believes that outside pressure to change or harmonise its taxes more rigidly is unfair, and would create dishonest competition.

"I believe that firstly taxation must remain in the sovereign power of the member states, which means unanimity to change any rules. Secondly that tax competition will put downward pressure on company taxes throughout the EU, as governments find it politically expedient to shift the tax base from individuals who have a political vote onto companies who have no vote," MEP and Conservative Foreign Affairs Spokesman in the European Parliament, Charles Tannock, told The Slovak Spectator.

"As to the level of the structural funds, this budgetary issue can as I understand it be altered next year, and although this would cause an enormous political row it's conceivable that unless some lower corporate rate tax band is agreed on by unanimity then the big government spenders and net contributors, such as France, Germany, Holland, Denmark, among others, may try and force this issue through, particularly if there is more relocation of factories to the new member states and the unions in Europe put pressure on its governments," Tannock added.

Discrepancies within the EU countries, over the structural funding and tax harmonisation abound, just as much as the arguments.

Slovakia adopted a flat income tax rate of 19 percent on January 1, 2004, which received accolades from acknowledged financial institutions, and is consistent with the new member states, whose averages fall below 20 percent; whereas, in the founding member states it often exceeds 30 percent. In Germany the rate is almost 40 percent, and in Sweden it ranges between 30 percent and 60 percent.

"Our tax system today strongly supports economic growth in Slovakia, and thus supports decreasing the budget burden of the most developed EU countries... According to EU rules, income from structural funds cannot be used as a replacement for domestic sources to finance development projects. Thus, it is not a replacement of Slovak money with German or Swedish money," Mikloš said in an earlier interview with The Slovak Spectator.

However, last May EU officials made it clear that they were not considering harmonising corporation tax.

Frits Bolkestein, the European Commissioner, responsible for internal market taxation and customs union issues, supports rational competition in fiscal policy, adding: " Taxes in Europe are too high and represent a threat to economic development."

"Those who want to criticise tax dumping are missing the point," said Jonathan Todd, spokesman for the European Commission for Tax Issues. "If a state wants to compensate its geographical location on the edge of the EU, it has every right to adopt the taxes it wants."

Slovakia is entitled to more than Sk60 billion (€1.5 billion) of structural funding between 2004-06, nominally earmarked for agriculture, rural development, the environment and infrastructure development.

According to analysts it is likely that a common policy on direct taxes would require opening the accession treaty, which has to be approved by all member countries. So far, almost all central European countries have refused such initiatives. The only exemption was the Czech Republic, which has a 28 percent income tax rate.
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