Germany expects Irish tax reform in return for IMF loan restructuring

Germany has said it expects Ireland to reform its tax system after Berlin backed its request to restructure the Irish EU/IMF loan package - a change which could save the exchequer an estimated €400 million annually.

The Bundestag’s quid pro quo demand came as MPs backed Ireland’s request to set aside a provision of its bailout programme requiring EU and IMF loans to be restructured in parallel. German government MPs urged Dublin to use the money saved by the loan adjustment to improve its debt position rather than financing tax cuts.

Yesterday’s positive vote in Berlin was a significant step in Ireland’s campaign to repay early €18 billion of its €22.5 billion IMF loan, refinanced by lower interest loans on financial markets, without altering the terms of EU crisis loans.

Changing the terms of Ireland's EU/IMF programme requires unanimity from all EU member states and Bundestag support is a pre-requisite to Berlin agreeing any bailout changes.

Support for Ireland’s request came from the governing Christian Democratic Union (CDU), its Bavarian CSU allies, the Social Democratic Party (SPD) coalition partners and, with one abstention, the opposition Green Party. The opposition Left Party voted against the measure.

Despite widespread praise for Ireland’s reform efforts yesterday, the Bundestag debate was shot through with demands that Dublin move to close tax loopholes for multinationals.

Before the vote the Bundestag budget committee called on Berlin to “continue unabated” its bilateral and multilateral campaign to reduce legal tax avoidance in Ireland.

“Solidarity is not a one-way street, we expect from Ireland solidarity with its European partners, for example in tax questions,” said deputy finance minister Steffen Kampeter in the Bundestag. He said Ireland was “doing itself no favours” with a fiscal regime that gave large companies based in Ireland, “mostly US companies ... a huge tax advantage compared to European companies”.

With a nod to ongoing international talks, Mr Kampeter welcomed a new Irish willingness to discuss its tax residency provisions for companies. The goal of such talks, he said, “should not be about abolishing all tax advantages but fair tax competition for all in Europe”.

Mr Kampeter said that it was in the interests of Ireland, Germany and Europe to accede to Ireland’s request. Ireland’s rapid recovery, he said, had proven right the decision to make assistance for crisis countries conditional on structural reforms.

“For all of those who didn’t believe in this programme and who painted doom-laden scenarios ... perhaps you should apologise to those who stood for this strategy,” said Mr Kampeter to the Bundestag.

CDU MP Norbert Barthle, member of the Bundestag finance committee, agreed with the restructuring request but promised German foreign minister Wolfgang Schäuble “would continue to push Ireland to move” on its tax regime.

“Ireland is harvesting the fruit of its efforts in the last three years and those efforts were not inconsiderable,” said Mr Barthle. “It shows that the right economic mix -- of demand- and supply-side policies, combined with structural reform and growth-driving impulses -- are the right way out of malaise.”

The CDU’s coalition partner, the Social Democratic Party (SPD), agreed with the loan change request from Ireland, though their support came with a “big but”.

“The Irish government should use the money save to reduce its debt position,” said SPD MP Johannes Kahrs. “If the Irish government considers using the money saved for an income tax reduction, one has to ask ... why this is happening in Ireland and not here.”

The opposition Left Party said adjusting the EU/IMF programme’s repayment did not make it any fairer for the Irish people, who had shouldered the cost of bank speculation.

“Rescuing Ireland was not just a gesture of solidarity but lay in the interest of German big banks,” said Left MP Richard Pitterle, saying German bank exposure to Ireland in 2010 was $138 billion.

The Green Party supported the loan adjustment, with one abstention. But Ireland’s situation should not be viewed with “rose-tinted glasses” given continued high debt levels and youth unemployment.

Green Party MP Sven Christian Kindler called on Dublin to use money saved to “investment in education and climate protection”.