The EU's newest members have reacted angrily to criticism from Nicolas Sarkozy, France's finance minister, that their low corporate tax rates are unfair. Sarkozy has claimed that the EU's 10 new members' states low corporate taxes are unfairly drawing jobs and investment away from older EU members.
Sarkozy threatened, in a television interview on September 6 2004, to propose that countries new to Europe that have taxes below the European average should not be eligible for structural funds from the EU. Average top rates of corporate tax in the 10 new member states are 21.5%, compared with 31.4% in the older 15 members.
But the EU's newest members rejected the criticism, claiming that their tax systems comply with all EU and OECD guidelines on direct taxation. Speaking at the International Fiscal Association's (IFA) Congress in Vienna, Renata Blahova, a tax partner at Leitner + Leitner in Bratislava, defended her country's tax code.
"The principles behind it were to have simple and fair taxes," said Blahova. "The tax act is very short and this was a good marketing strategy for us. I hope that something that was supposed to be fair and simple will not be declared unfair tax competition by the EU or the OECD."
Other speakers at the IFA Congress agreed: "Hungary is in a competitive situation with all EU member states and tries, like the others, to attract foreign direct investment through its tax system," said Balázs Békés, a tax partner at Deloitte in Budapest.
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Clemens Hasenauer: Tax competition between countries is natural |
Békés' colleague in Cyprus, Antonis Taliotis, also defended his country's tax system: "Foreign direct investment is the largest source of revenue after tourism so it is very important that Cyprus remains competitive."
Claus Staringer, a tax partner at Freshfields Bruckhaus Deringer in Vienna, is well aware of the growing controversy over direct taxes in Europe.
"It's a general pattern that new member states have decreased their corporate taxes to attract investment," said Staringer. "Here in Vienna we see the phenomenon of international tax competition every day and we have to follow the trends to advise our clients where to go."
Austria has reacted strongly to competition from its central and eastern European neighbours by reducing the corporate income tax rate from 34% to 25% from January 1 2005. The government will also introduce an attractive group taxation scheme to promote Austria as a hub for companies' regional headquarters.
"It is a natural reaction to compete with the neighbouring countries," said Clemens Hasenauer, head of the tax department at Cerha Hempel Spiegelfeld Hlawati in Vienna. "It is not very difficult for an investor to move 100 miles east to get a better tax structure."
The problem is unlikely to die down quickly, despite EU finance ministers agreeing to look at ways of harmonising harmonizing the method of calculating company taxes in Europe at a meeting in the Netherlands on September 12 2004.
Simon Briault
