Department resists Corporation Tax plan

THE Department of Finance is believed to be resisting proposals for an early announcement that the Government will move to one Corporation Tax rate of around 12.5 per cent by 2005. Officials are understood to be arguing that further work is needed before the plan is announced and the rate should be 15 per cent or higher to safeguard the Exchequer's revenue yield.

EU approval for the existing 10 per cent manufacturing corporation tax rate runs out in 2010, while approval for the rate as it relates to IFSC companies is to endin 2005.

At the moment, the standard rate is 36 per cent and there is a special 28 per cent rate charged on the first £50,000 of profits. Under the plan, which has been worked con for months by Government officials, a single rate would be introduced by 2005.

The Department of Enterprise and Employment and the Minister, Mr Bruton, is believed to be arguing strongly that the new rate should be no higher than 12.5 per cent so that Ireland remains an attractive location for inward investment. It has pointed to the strong inflow of projects in recent months which has allowed the Government to boast that 1,000 jobs a month are being created.

However, Department of Finance officials are arguing that the rate should be at least 15 per cent so as not to lose too much revenue. The officials are also pointing out that the move to a low rate would provide a huge windfall gain to big organisations such as banks who now pay at the 36 per cent rate -without any obvious payback to the Exchequer. According to sources, Finance believes that some way should be found to ensure that the big financial institutions do not make such a gain. Final agreement must also be reached on a range of other measures to accompany the reduction in the Corporation Tax rate. It is likely that the Business Expansion Scheme will be abolished as part of the move. Tax credits, which ensure that shareholders get some relief on dividends paid from companies, may also be abolished as a way of trying to ensure that companies retain profits for further investment.

There is now likely to be a final intense round of discussions to see whether a final announcement is made on the Corporation Tax issue before the election and, if so, whether the new rate will be included in such an announcement. Business lobby groups have also called on the Government to clarify its position on the issue. Major investment projects - particularly capital intensive ones in sector such as pharmaceuticals - have long planning time horizons and industry groups are claiming that a decision is essential soon. Some sources claim that Ireland is already losing out on inward investment as a result of the uncertainty caused by the future of the corporate tax regime.

The issue has already been the subject of months of discussion and study at official level, but it is not now clear whether this will allow an announcement before the expected election, or whether the issue will be left to a new administration to finalise.