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Bolkestein reassures Ireland Back  
Initial utterances by the new Internal Market Commissioner sound good from the Irish point of view, writes Una McCaffrey.
Frits Bolkestein, newly appointed EU Commissioner with responsibility for the Internal Market, has, by anyone’s standards, got a hard act to follow. Mario Monti, Bolkestein’s predecessor was viewed as a thorn in the side of many. The tax ‘harmonisation’ suggestions made by the forthright Monti were of particular concern to Irish authorities. He was at the forefront of negotiations which eventually led to plans for a reduction of the Irish general corporation tax rate to 12.5 per cent, and were putatively an influence behind the introduction of a controversial dividend withholding tax which appeared in Ireland in the 1999 Finance Act.

Another legacy of Monti, particularly worrying for the IFSC, is the 1998 proposed Directive on Savings Income which, it has been suggested, could drive the bond market out of Euroland. In light of such policy initiatives, it could be presumed that not many in the financial markets were weeping as they saw Monti move, under the new Commission of fellow Italian Romano Prodi, to the Competition Directorate where he might have less direct influence over their affairs.

Frits Bolkestein, the new Internal Market Commissioner, comes straight to the Commission from the front stage of Dutch domestic politics, where he was a Member of Parliament for the last sixteen years, and a party leader for the last eight. He also spent five years in government, partly as Minister for Defence and partly as State Secretary for Economic Affairs. Prior to his political career, Bolkestein was employed by the Royal Dutch Shell Group for sixteen years in various postings in East Africa, Central America, Indonesia, London and Paris.

Last month, as part of the new transparent face of the European Commission, all the prospective new commissioners were summoned before the European Parliament where they underwent intensive questioning, both oral and written, about their intentions towards their prospective role. In Bolkestein’s replies, it soon becomes apparent that while he does not intend by any means to abandon the Monti strategy, he does plan to put his own stamp on his portfolio.

On the tax harmonisation question, Bolkestein was far from belligerent in his Parliament replies. He said that ‘on the one hand, harmonisation is needed in the interests of the single market’, but went on to say ‘I see no reason why income tax should be harmonised’. The new Commissioner argued that while VAT and duty should be harmonised as far as possible, income tax harmonisation would be much more difficult and perhaps not quite so necessary.

He went on, ‘the progressivity of such taxes and the top rates are so bound up with the economic financial and social structure of member states that I do not really see how such harmonisation could be brought about, even in the long term, and nor do I see any need for it, since the various rates of income tax do not distort the internal market’.

However, according to Bolkestein, there exists nonetheless an ‘intermediate zone’ between harmonisation and non-harmonisation’, the responsibility for which lies with the Code of Conduct group chaired by Dawn Primarolo. Bolkestein went on to hope that the Primarolo working party’s work will be concluded by the Helsinki European summit in November. He said also that the payment of interest on savings issue and the issue of interest and royalty payments between associated companies might be concluded before that date.

Corporation Tax

In response to a question on whether or not Bolkestein would ‘appeal personally for harmonisation of a minimum rate of corporate tax’, the Commissioner pointed subtly yet obviously to the particular case of Ireland in his reply: ‘One could imagine, and it has been suggested by one member state, having a minimum rate of, for example, 25 per cent. That would mean that a member state with a rate of 12.5 per cent - this is no more than an example - would not be in compliance with the directive and would therefore have to increase its rate of 25 per cent. I believe that it is not necessary at the present time for us to involve ourselves with general tax rates, not even in connection with the Primarolo working party. If a particular member state offers a low rate of tax for foreign companies, which can be used by domestic companies, then there is no discrimination between foreign and domestic companies, in which case the rules of the single market would of course apply’. Reassuringly for Ireland, Bolkestein even turned the attention away from low corporation tax, and towards the higher levels: ‘let us not just be concerned about a general tax rate, but let us look at what other member states, which levy more tax, do with that extra money, such as improving their ports and airports, or improving research at university level’.

On the VAT and duty issue, while harmonisation is ‘important’ to Bolkestein, he said the area is ‘full of pitfalls’. ‘One member state charges 17.5 per cent, while another charges
25 per cent. If we arrive at a uniform rate between the two, let us say 22 per cent, that means that the member state with the 17 per cent rate must increase its rate of VAT by five percentage points. That would mean reducing income tax in that country by an equivalent amount. That would mean a colossal shift from direct to indirect taxation. As you know, income tax is progressive and VAT is degressive [sic].

This would therefore give rise to considerable debate in such member states and I see no way
in the short term of finding a way out of the impasse’.

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