Agreement with EU Commission on Corporation Tax

The Government has reached agreement with the EU Commission on the arrangements for phasing in the 12.5 per cent general rate of corporation tax for trading activities. The agreement was approved by the Commission at their meeting today and the full text of the agreement will be published shortly in the Official Journal.

The Governments decision to introduce a 12.5 per cent corporation tax rate for trading profits has been the subject of ongoing discussions with Commissioner Van Miert and his officials on the timetable for phasing in the new regime. The proposed new rate of tax was not an issue in these discussions, but the Commission wanted the new regime to be fully implemented as soon as possible.

The move to a 12.5 per cent corporation tax rate on trading profits is designed to ensure the continued flow of investment and jobs in the Irish economy. In addition it removes the outdated distinction in the fiscal treatment of manufacturing and services and enhances the reward to risk ratio of Irish enterprise. It also addresses the concerns of the Commission about State aid aspects of Irelands present corporation tax regime.

Welcoming the agreement, the Tanaiste and Minister for Enterprise, Trade & Employment, Ms Mary Harney TD and the Minister for Finance, Mr Charlie McCreevy TD, said that it provided a constructive framework for phasing in the new corporation tax regime which balanced the Commission's concerns for early implementation with the needs of the Irish economy. The agreement will enable the industrial development agencies to plan for the future with the certainty required by an internationally competitive business environment.

The introduction of a 12.5 per cent corporation tax rate by 1 January 2003 will require average reductions in the standard rate of corporation tax on trading income of 4 per cent per annum over the next five years. While the cost of these reductions should be partly offset by buoyancy factors, they said that it will be necessary to look very closely on an ongoing basis at all existing business tax reliefs and the continued rationale for some or all of these. The Government will also examine in depth the scope for revenue raising measures aimed at supplementing the revenue yield from the business sector to ensure that the business sector will continue to contribute an appropriate share of overall tax revenue.

The Tanaiste and the Minister said that a single low corporation tax rate on trading income is in the best interests of the Irish economy and underpins the progress made in this area in recent years. It will support the strong growth in jobs which is needed to cater for the substantial annual increase in the labour force and to provide jobs for those presently unemployed.

The Government will continue in parallel to reduce the income tax burden on employees in the context of ongoing Social Partnership.

As regards the necessary legislative amendments to provide for the new corporation tax regime, they said that these would be included in next year's Finance Bill.

The following are the main provisions of the agreement reached with Commissioner Van Miert:

• a general 12.5 per cent rate for trading profits will apply from 1 January 2003;
• however, existing operations which are eligible for the 10 per cent rate will retain entitlement to this rate until the end of year 2010 in the case of manufacturing and certain internationally traded services and until the end of year 2005 in the case of the International Financial Services Centre and the Shannon Zone;
• new projects establishing after today in manufacturing, certain internationally traded services and in the IFSC or Shannon will be eligible for the 10 per cent rate in respect of their activities until 31 December 2002 after which they will then be subject to the 12.5 per cent rate;
• a number of specific projects on a pipeline list agreed with the Commission and which are approved by IDA Ireland or approved for the IFSC by 31 July will have entitlement to the 10 per cent rate until the end of 2010 or 2005 as appropriate;
• the deadline for the approval of new projects at the IFSC and Shannon (i.e. the marketing deadline) will be brought forward by one year to 31 December 1999; new projects establishing at the IFSC and Shannon after this date will be liable for the standard corporation tax rate then applying.

In order to meet the Commissions concerns that the transitional arrangements be managed in an orderly manner, the Government have also agreed to regulate the number of new IDA Ireland and IFSC approved projects gaining access to the 10 per cent rate between now and 1 January 2003, when the 12.5 per cent rate will be introduced. The overall number of new IDA supported greenfield projects and new IDA supported projects by existing foreign-owned firms established in Ireland will not exceed 77 projects per year during the period 1998 to 2002 inclusive. There will also be a ceiling on the number of new IFSC projects which will be set at 67 projects per year for the years 1998 and 1999. These levels correspond to the actual average number of new project approvals over recent years and will permit a continuation of the results achieved in this area in the last few years.

The restrictions will not apply to expansion projects, in the context of the original grant agreement, by foreign-owned firms already established here or to additional managed entities established in the IFSC by existing projects as part of their approved trading operations. There will be no specific ceiling on the number of new projects setting up in Shannon in 1998 and 1999 but there will be consultation with the Commission if there is any likelihood that the number will exceed the annual average in recent years.

Similarly, the number of new manufacturing/international services projects of indigenous firms which are grant-aided by the industrial development agencies and the number of additional managed entities in the IFSC will be kept under review in consultation with the Commission.

The 12.5 per cent corporation tax regime will be fully compatible with the Code of Conduct on business taxation which was agreed by ECOFIN last December. This Code is designed to curb harmful tax measures involving lower rates than the general rate of corporation tax in the country concerned. It does not aim at harmonising corporation tax rates in the Community and does not affect a general low rate of tax such as the proposed 12.5 per cent rate.