By Sophie Ashley
A member of the European Commission has said he does not believe Ireland can retain a low tax policy if it wants to cut its budget deficit.
"Ireland is not going to be a low tax country in the coming decade," Olli Rehn, EU commissioner of economic and monetary affairs, told journalists in Brussels last month, where he was attending a meeting of EU finance ministers.
The Finnish official's comments were reported in the Irish press as referring to the 12.5% corporate tax rate, attracting a large amount of criticism for the commissioner and causing uncertainty for international business.
However, Rehn did not mention the low corporate tax rate during his comments.
"The Irish Government has acknowledged that raising taxes is a necessary part of any economic readjustment but that does not extend to corporation tax," said a letter sent out to clients by PwC in response to concerns over the longevity of the 12.5% corporate tax rate.
Instead, there is speculation that the government will introduce a property tax on domestic residences as a first step towards increasing tax revenues.
While this is not the first time the press has raised the issue of increasing Ireland's corporate tax rate, the Irish government has reacted strongly to the commissioner's comments. Previously the government had commented any corporate tax rumour.
"The government has made clear that it will accept no change to its policy on corporation tax. In a short statement, released by the Department of Finance, the current rate of 12.5 % corporation tax is described as "a cornerstone of the Irish industrial policy," said the Irish government's news website.
"The timing of it [the government statement], given the probability, is the most serious the state has ever taken it [corporate tax issue]," said Feargal O'Rourke, tax partner at PwC.
The idea that the EU could force a member state to change a tax rate has raised the issue of member states' freedom to set tax policy.
"It's a threat to sovereignty," said O'Rourke, who expects further strong declarations from the government, in support of the corporate tax rate, in the budget on December 7. "We would get a lot of support from other EU members over the principle to decide our own tax policy."
While the debate rages on over Ireland's need to raise its revenue PwC believes an increase in corporate tax would be ineffective.
"The reality is that Ireland's corporate tax take represents about 11% of the overall exchequer revenues in 2009 or about €3.9 billion ($5.4 billion). Even arithmetically moving the rate upwards is unlikely to generate significant revenues and that is before factoring in the negative impact which this would have on inward investment," said the letter.
