Tax-cut war raging across Europe
A tax-cut war is spreading across Europe as leaders of the continent's biggest economies give up criticizing smaller neighbors for slashing business rates and decide to join them instead.
The move toward lower levies on corporate profits in Spain, Germany, France and the United Kingdom is aimed at wooing companies and reinforcing the strongest economic expansion in six years. It comes after Ireland and new European Union members from eastern Europe succeeded in attracting investment, and irking their larger rivals, with tax rates of less than 20 percent - among the world's lowest.
"The gloves are off," says Erik Nielsen, chief European economist with Goldman Sachs Group Inc in London. "Bigger countries are now competing on taxes. This is very much something that will determine how much and where companies want to invest."
The EU's average corporate tax rate at the end of 2006 was a record-low 26 percent and is falling even more. Gordon Brown, the UK's chancellor of the exchequer and prime minister-in-waiting, in March lopped 2 percentage points off the top rate, which is now 28 percent. Germany's lower house of parliament last week backed Chancellor Angela Merkel's plan to pare its corporate rate to 30 percent from 39 percent.
Nicolas Sarkozy, elected French president this month, promises to reduce his country's 33 percent rate by at least 5 percentage points. Spanish Prime Minister Jose Luis Rodriguez Zapatero's government is cutting its rate to 30 percent from 35 percent; and the premier of Italy, Romano Prodi, is considering a reduction in his country's 33 percent rate.
The rush to lower business taxes is a turnaround for the region's biggest nations, whose governments once complained their neighbors were engaging in "tax dumping" and threatened to cut aid to them. Just three years ago, Sarkozy, then France's finance minister, sought EU support to implement a common minimum corporate tax rate throughout the bloc.
Feeding the complaints were business-tax reductions by Poland, Slovakia and Hungary prior to their European Union entry in 2004. Poland cut its levy to 19 percent from 27 percent. Slovakia adopted a flat-tax rate of 19 percent, down from 25 percent, and Hungary went to 16 percent from 18 percent.
The lower rates helped lure operations from companies in higher-tax countries. Paris-based automaker PSA Peugeot Citroen SA and Munich-based engineering firm Siemens AG, for example, moved some production to Slovakia.
"Corporate tax has been an important part of the story in strengthening growth, balances of payments, fiscal performance and currencies" in eastern Europe, says Philip Poole, head of emerging-markets research at HSBC Holdings Plc in London.
Now, falling budget deficits are making it easier for Sarkozy and other leaders to join the tax-cutting competition. JPMorgan Chase & Co forecasts the budget shortfall in the 13 nations that share the euro will shrink to 1 percent of gross domestic product this year, down from 2.5 percent in 2005.
Supporters of lower corporate taxes point to the success of Ireland, whose 12.5 percent rate, the lowest in the developed world, is down from 47 percent in 1988.
That proved a magnet for such US-based technology companies as Microsoft Corp, Intel Corp and Dell Inc and helped Ireland's economy grow more than three times the rate of the eurozone in the past decade, while still running a budget surplus in nine of the 10 years.
Bloomberg News
(China Daily 05/30/2007 page16)
